Joe Duran is back to being an entrepreneur: After building and then selling United Capital, a large registered investment advisor, to Goldman Sachs in 2019—and joining Goldman as a partner—he launched Rise Growth Partners, which he calls “a McKinsey-slash-private-equity investor,” last year.
Speaking with Barron’s Advisor, Duran describes the target clients of Rise, which has already signed two deals, saying he is hunting for the midsize RIA that has “cracked” Gen Y. That generation holds vast potential and doesn’t want to work with today’s firms, Duran says. He explains why most RIAs are happily living in the “Dark Ages.” And he argues that Rise has already helped change the M&A calculus for businesses with $3 billion to $5 billion of assets.
After spending 4 1/2 years at Goldman, you are back to your entrepreneurial roots. I tried the sitting-on-the-beach thing. It’s not for me. When I left Goldman, I realized the whole industry had changed a ton. At the time we sold [United Capital] to Goldman, we were one of the biggest, at $25 billion. Four years later there were several hundreds-of-billions-of-dollar RIAs. And for the first time ever, there was an actual middle market: There were all these firms with $3 billion to $10 billion, hundreds of them. That’s why I got back in. But I knew I didn’t want to do it the way I’d done it before. I did not want to be the guy who’s got to make payroll, losing sleep every night about the hundreds of employees we’re responsible for.
The industry is all about scale. Shouldn’t you be combining firms into giant entities rather than helping midmarket ones grow? You can’t be all things to all people, even if you’re a firm the size of Goldman. Goldman is the king of the ultrahigh-net-worth client. They are amazingly good at it, and they’re very good at focusing where they dominate. What’s happened with the mega firms in the RIA space is that they look very much like Merrill Lynch or Morgan Stanley, any one of the brokerage firms, except that they’re doing it under the RIA umbrella. To do all the acquisitions they’ve done, they’ve had to become much less specialized and much more generalist. A lot of the large firms are unified in name and messaging but not in delivery of experience. They’re doing so many acquisitions that the end client often doesn’t have much change in their lives other than the name of the firm that is servicing them. And the advisor continues doing what they were doing prior to the sale.
There is without a doubt a firm with $7 billion that creates a much more unified end-to-end client experience and has a clearly articulated niche. They have the ability to win in this space, to have better organic growth, to have more satisfied customers. And will those firms grow to $30 billion or $40 billion before they hit the same roadblocks that happen with scale? Of course. But at that point they will be worth a billion dollars. And what will happen, I think, is that the mega firms will want to acquire these firms that have specialized practices and have become dominant in a segment.
Rise’s targets are independent, middle-market RIAs. Which boxes do they have to check? We do very detailed internal analysis on-site. Obviously, they’re going to be big enough. By size, I don’t mean just assets under management. I mean, do they operate like a business or a lifestyle practice? If the CEO is also the main rainmaker, the CFO, and the chief compliance officer; if they don’t have an equity structure; and if the founder really runs the entire business, it doesn’t matter how big they are—you don’t have an investible business. Secondly, they have to have a platform that we believe can be scaled and that we can refine and improve. Third, they have to have a market segment we believe in.
The table stakes are: They have to be good people, we have to like them. And the math has to work. Beyond that, do you have a niche we believe in? Do you have a management team that wants to build a really good, large, exponentially growing business? Do you have a platform we can scale? We come in as an unpaid partner, and we bring in the multimillion-dollar talent they can’t afford. All our partners invest in the firms that we invest in, along with Charlesbank [Charlesbank Capital Partners, the private-equity firm that has committed $250 million to Rise]. We’re like a McKinsey-slash-private-equity investor. We’re actively involved in helping them build out their organic strategy, helping them evolve their technology stack, figure out their branding strategy, those kinds of things.
Talk about the two firms you’ve invested in so far. The first, Bleakley Financial Group [since renamed OnePoint BFG Wealth Partners], has amazing people with an incredible business model, fully integrated, all-in-one brand, one culture, one platform. They would recruit advisors who were at the very top of the insurance business, $500 million, $1 billion, $2 billion in assets. I love that business. I think it’s a neglected segment of the industry. None of their advisors were W-2 employees, they were all 1099s. So I said, “Andy [Schwartz, OnePoint’s CEO], I love everything you’ve done, and I think we can help you to make this into one company, because the hard part is getting these advisors to turn from being contractors of your services to being employees of your firm.” We ended up having an incredible adoption rate. And their revenues have grown to almost $12 billion from about $8 billion when we invested. We’ve got several multibillion-dollar acquisitions in the pipeline.
Grimes & Co. was another firm with a clear niche: They’re investment-centric, which is an area of the market that I think a lot of people ignore. They have an incredible investment platform to manage portfolios at scale, but in a totally customized way for every client. And they are in all the custodial programs. There are not a lot of firms that, when you’re acquired, don’t force you to move your investments into the models their parent company owns. When you add planning, you pick up wallet share, you increase client satisfaction, and a lot of these firms don’t know how to make that transition. Kevin [Grimes, the CEO] and his team have a centralized planning group. We’re in discussions to acquire a couple of firms, keep their investment strategies executed centrally by the team at Grimes and then deliver planning in addition to the services they’re already delivering. People say, “Does Rise tell you how to run the business?” I think if you spoke to Andy or Kevin, they’d say we’re the dream partner. I don’t think a day passes where one of them is not calling somebody on our team to say, “Hey, how do we solve this problem?”
You’re a keen observer of the industry. Give me two to three themes that will shape wealth management in the next five to 10 years. No. 1, and most importantly, what is the endgame for these sponsor firms? What is the value for these firms once they’ve gotten to full size? I don’t think it’s been proven yet. Because they don’t have the revenue sources Morgan Stanley or Goldman Sachs has. They don’t have banks. They don’t have all the other revenue streams that come from creating products. So they start to look a lot like wirehouses with additional services. That’s the first big question: What are the exits? Because you can only do so many sponsor-to-sponsor deals. At some point somebody’s going to have to go public or sell to a strategic acquirer.
The second theme is, where does organic growth come from? We now have more advisors than we have clients to serve, because most clients with wealth today are retiring. The business model is not where a lot of these firms have organic growth, even the mega firms. So there’s a limit. The third theme, to me, is the most exciting: Who’s going to get Gen Y right? There is another baby boom generation coming, and they’re just coming into wealth. I don’t think they’re going to be comfortable with any of the established entrants today, because I don’t believe they are 1%-AUM-fee payers. We’re going to have to have a combination of subscription planning fees and investment fees. That might look quite different for Gen Y than it does for Gen X and for the baby boomers. The battle I have is trying to find somebody who’s cracked Gen Y, and that’s been very difficult. Maybe because you need advisors who are that age, and nobody’s figured out how to do it profitably at scale.
If I were to go down to a smaller firm, it would be because I found a solution set that we think solves for this. It’s something we’re looking at with Grimes and OnePoint: How do we offer a service that works for people who don’t have the wealth yet but don’t want the traditional model, who are digital first? That’s going to shape the whole industry, because that’s where growth is going to have to come from. The younger generation is much more in charge of their destiny and, as such, won’t pay the same fees. Which is why entrants like Robinhood are going to disrupt the industry.
Another disrupter is artificial intelligence. How do you think it will impact the industry? When you actually use AI, you realize it’s not very smart. It’s very good at processing things, but you get a lot of error warnings. Will it make businesses a ton more efficient? Yes. It makes onboarding easier, allows you to shorten the trust cycle. It can do all kinds of things. But I know for a fact that most businesses will be too slow to adopt. Most RIAs are not progressive in how they evolve. Honestly, look at their websites and you’ll see they’re in the Dark Ages. And they don’t need to change. They’re making a really nice life—why change?
So we’re viewing AI as a key pillar of what we bring to the table. There are so many ways to apply AI today, even though it is not smart technology—not dumb, just not smart. You can use it to do business analytics and data assessment and, most importantly, shorten trust cycles in ways that are unbelievably exciting. I do think that’s the solution set for Gen Y, because you’re going to need a different way of experiencing the model with clients, and I think AI is going to be a big part of that.
What would you like your impact on the industry to be? I’m always interested to see if I can evolve the industry. If nothing else, I know we’ve improved the environment for people to raise capital. Because we entered the market, everyone’s now saying you can get a minority investor. It’s made firms at $3 billion or $5 billion ask why they would ever sell to one of the large national firms if they believe they can get to $10 billion? I do know that our entry into the market has fundamentally made it less appealing to join a national firm.
Thanks, Joe.
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