By Steve Garmhausen
Heritage Wealth Advisors' specialist model has proven its worth: Surrounding its financial planners with tax, estate, and legal experts lets it compete successfully against marquee firms for business. "It's really fun when we can go to a client and say, 'Hey, we can save you eight figures in taxes compared with this other firm,'" says CEO Erin Scannell.
In October, Heritage, the second-largest Ameriprise practice by revenue, announced it had bought AGP Wealth Advisors, Ameriprise's fifth-largest team, in part to double down on the specialist strategy. Scannell says the combined $8 billion firm -- Heritage is based in Mercer Island, Wash., and AGP in nearby Renton -- will use artificial intelligence to enhance its operations, but it won't lay off staff. Speaking with Barron's Advisor, Scannell, who is one of the industry's underdog success stories, explains why he has only one person reporting directly to him. He sees pain ahead for sole practitioners. And he expects financial advice to borrow from Netflix's playbook and evolve into a hyperpersonalized experience.
Why did you do the acquisition? When I started in the industry, I interviewed at a bunch of firms, and no one would hire me. Ameriprise was the one that let me essentially rent an office from [Randall Linde, the CEO of AGP], who had done a couple of my interviews, so I've been friends with him for 26 years. He was getting to the point where he started to want to retire. He isn't retiring yet, but he's got a big enough team where putting together the formal succession plan made sense timing-wise. So it's a succession plan for him.
He chose us from a bunch of firms that wanted to acquire him because we have very similar models. We both use a specialist model, essentially where the advisor sits with the client kind of like the primary care physician would, but just like in healthcare, we surround that position by experts. We've got CPAs, estate attorneys, Social Security specialists, Medicare specialists.
We were both motivated by broadening the number of specialists we can bring to bear for clients. We feel the future of wealth management is going to be pretty tricky with AI. We're already seeing a race to the bottom fee-wise.
So the antidote is to basically provide more value with a specialist approach. Yes. We haven't reduced our fees, and we don't plan to across the next five or 10 years. We want to be the high-experience, high-value firm. It's a premier service, and we'll charge accordingly for that.
How did the financial end of this deal work? One of the big benefits to our affiliation with Ameriprise is the ability to use their lending. We've used outside banks in the past but found over the years that Ameriprise was more liberal with how they would lend. So we got the full lending from Ameriprise, and did a stock swap for around 20% of the transaction.
How are you approaching integration of the businesses? We have a very detailed integration plan over a three-year period. We have made the mistake in the past of acquiring firms and integrating too quickly, and it's too disruptive. It causes stress on people, and it can disrupt the experience of the client too. So we're going to do it slowly and thoughtfully.
Are the specialists you mentioned all in-house employees? The specialists are all employees, other than the CPAs and estate attorneys, who fall into two categories. Some of them are employed by Ameriprise and some are with separate firms that we have formal partnerships with, where we share clients and revenue.
How are you using AI? I've had a lot of fun with that. One of the tools is Ameriprise's eMeeting, which produces beautiful decks for meetings. We have around 15 systems we have to go into to gather data. There are meeting notes across years and years. This tool takes all that stuff and compiles it into 12- to 15-page decks that are clear, simple, and nice looking. They'll have a financial plan summary, the goals and their status, performance, whether the client needs to take their RMD, whether they're close to Medicare age, and so on.
We're also using tools that use AI and machine learning to consider hundreds of client data points, including subjective things like personas and demographics, and either share insights the advisor should consider or recommendations the advisor should consider making to the client.
AI looks like it will replace a lot of back-office staff in the industry. What you see a lot in the industry, and across industries, is that when you gain efficiencies you cull the team. Our principle is that we're not going to lay people off. If we have good people, we're going to just pivot where their time is spent on activities that are more valuable to the client. So rather than administrative stuff, they're going to be reaching out to the client and wishing them a happy anniversary or whatever. That human connection aspect will be a key part of how we help to avoid what I think will be very disruptive in the next five or 10 years.
How have you built out the management structure as the firm has grown? We use the EOS system, the most commonly used operating system for small and midsize businesses. EOS has a set of protocols to it, and one of them is that in the org chart the CEO has one direct report. I used to have a bunch of direct reports: the lead of the finance planning department, the lead of the investment department, the lead of operations. Now I have one, whom you could call the COO. The COO now has those department leads reporting to him. So my world has simplified in some ways. Although really, almost my entire life is about dealing with the most complicated, difficult problems that we're trying to navigate.
What's your approach to using alternative investments? We've used a high percentage of alternatives for around 25 years. Our intention is to manage money similarly to institutions, endowments, or sovereign-wealth funds. Institutional investors allocate 23% of their portfolios to alternatives, whereas individual investors only allocate 6%. We're doing that largely from the perspective of a risk-to-reward ratio. We're finding we can get really good upside capture with reduced downside capture, especially in volatile markets. We use equity call writing, where you buy a stock and then sell options against it. We find that we can often get, say, 78% of the upside of the market and only 60% of the downside. In my opinion that's a winning trade. We're also using structured products. In short, we're using alternatives quite a bit to get better income and better risk/reward ratios. And we weight more to alternatives the higher the market gets, to help protect against a potential big downturn.
How are you innovating when it comes to tax, estate and trust planning? I don't know if it's innovating, but we're using strategies and getting outcomes that are allowing us to win a lot of competitive bids against some of the top firms. For example, we have a client whose previous wealth management firm, one of the top-ranked firms in the country, helped him figure out when he sold his business how to shelter $10 million of the proceeds from tax. By stacking Qualified Small Business Stock exclusions, we were able to set up multiple entities to get five additional $10 million exclusions. He'll liquidate more this coming year, and we'll be able to shelter about $50 million of that and probably a little bit more. We have CPAs and attorneys on the team who are driving these kinds of better outcomes and tax in estate.
It's really fun when we can go to a client and say, "Hey, we can save you eight figures in taxes compared with this other firm." It's adding an incredible value to the client, and it helps us win those competitive situations. This is something our specialist model allows us to do. The financial advisor, who's all things to all people, doesn't have the time to go through the tax code. They're meeting with clients and watching the markets all day. Whereas our specialists figure out those strategies; that's all they really do.
Sounds like you're pretty focused on upscale clients. What is your de facto minimum account size these days? The firm has a mass-affluent division, which often serves the kids and grandkids of our clients, who would typically have between $500,000 and $5 million. In our private client division it's going to be $5 million and up, with many in the $50 million to $200 million range.
What are your thoughts on the future of M&A in wealth management? I look out there and just see whales eating other whales. I agree, and that's what we would expect moving forward, a lot of consolidation. I don't think the sole-practitioner model will go away per se, but it's going to reduce a lot, just because you have all these advisors aging. There are 280,000 licensed financial advisors in the industry, and they predict that's going to get below 200,000 in the next five years.
So there will be a lower count of advisors. And it's more and more difficult as a sole practitioner when you don't have scale, because pricing is going up. And when I think about the expectations of clients now versus 25 years ago. We used to get away with offering them a few mutual funds and some asset allocation, and they'd be very happy. Now we've got to go so far beyond that to deliver good value. I think it's going to be really hard for the sole practitioners, so I would expect a lot of acquisitions.
How else do you expect wealth management to change? I'd expect more of a Netflix thing with advice. Think of what Netflix does: They hyperpersonalize our experience as a viewer. I think wealth management will need to do the same. Consumers' expectations are often influenced by these amazing tech companies like Uber and Amazon and Netflix. As a consumer, we expect an amazing technical experience because of those companies, and we don't really get that from the financial industry. I think we're doing a better job certainly than we have over the last five years, but it's got to be data-driven, hyperpersonalized, and potentially by subscription.
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