Episode Transcript
[00:00:01] Speaker A: Hello and welcome everyone. I'm Taylor Pankratz and this is behind the Breakaway. Together with my co host Jason Barber. This show takes you behind the scenes of leaving your captive broker dealer firm and explores the world of RIA independence.
[00:00:20] Speaker B: All opinions expressed on the podcast by the hosts and guests are solely their own opinions and do not reflect the opinion of Uptick Partners. This podcast is for educational purposes only and is not legal advice and should not be relied upon as a basis for any decisions.
[00:00:41] Speaker C: Hey guys.
[00:00:42] Speaker A: We are on location at A Breakaway, but given the news of LPL buying Commonwealth, we decided let's do an emergency pod. Let's have Jason Wink, founder of Altruist, give us his view on what's going on and so we hope you guys enjoy.
[00:00:57] Speaker D: Thanks Jason for joining the behind the Breakaway podcast and really appreciate your willingness to to come and join and share your thoughts on the Commonwealth and LPL merger that's happening. I thought I may tee up a few questions, but before that I'm going to do a quick intro of you for those that are not familiar kind of with your with your background. So just forgive me as I just read this here real quick. Jason Wink is the founder and CEO of Altruist, a fintech company revolutionizing the wealth management industry through its modern commission free custodial solution for financial advisors. Prior to Altruist, Jason founded Formula Folios, an automated investment platform that grew to manage over three and a half billion in assets earned spots on the Inc. 500 list of America's fastest growing private companies for five consecutive years. A serial entrepreneur and financial industry innovator, Jason began his career as a financial advisor at a young age and quickly became frustrated with the outdated technology and high costs that hindered advisors from serving clients efficiently. This experience fueled his passion for creating technology solutions that make financial advice more accessible and affordable. Jason is a respected thought leader in wealth management and frequently shares insights on the future of financial services. So with that, thanks again Jason for joining and really appreciate it. I guess I'll just tee it up and just ask you what your general thoughts are on this news that broke with Commonwealth and LPL. LPL's acquisition of Commonwealth.
[00:02:26] Speaker C: Rather cool. I got. So thanks for, for grabbing man, I, I, whoever wherever you got that bio from. I mean I have my, my marketing team or someone else, but it was very flattering, so very kind to do that was anthropic.
[00:02:41] Speaker D: I think that came up with that bio.
[00:02:43] Speaker C: Okay. I was gonna say that's one of the more impressive readings I've ever had but yes, so we obviously we were you know, kind of speculating a little bit I think late last week on this, you and I on LinkedIn and that that kind of all has come to fruition. Everything was kind of announced as being official this morning, including release from lpl and which I think is interesting because shortly after the rumors started swirling then it was kind of like, I don't know, maybe Jose is going to get in the mix. It's like this deal was done. So I'm not sure what kind of, you know how that speculation. But yeah, I think look, in the end this is, I don't know if I'd call it the icing on the cake but you know, sort of like there's been a trend of consolidation with independent broker dealers really going on like 12, 20 years. I mean when I first got into business there were hundreds of, I'll call them like reasonably large independent broker dealers. Now there's effectively a half dozen with really just a few that are behemoths and LPL being the kind of the biggest of them all. And Commonwealth was I think the last truly independent broker dealer because I think the thing that's, you know, the acronym is Quite funny, the IBD, you know, if all the IBDs are technically owned, are public or they're owned by private equity firms, are they really independent? And that was one that was truly independent. My understanding is like a dozen managing partners at some point they were going to have to seek liquidity, right. So whether that was going public or selling to private equity or being acquired. Right. So I think it's like one of these things are just a matter of time. The part that's probably extra frustrating for advisors is Commonwealth had a unique custody structure whereas I think, I don't know what the percentages, but an overwhelmingly large percentage of independent broke dealers were historically would sit on top of Pershing for their brokerage accounts. And Commonwealth to my knowledge had the vast majority of their assets on national financial broker dealer platform.
And if you're, if you were a firm that was like sitting on top of Pershing and you get bought and you get bought by another firm sitting on top of Pershing, it's fairly non disruptive, right. At the end of the day you're still working in NET x 360, your clients are getting the same name on their statements. There's not a lot that's happening for the most part when you get bought by a self clearing broker dealer like lpl, I mean you know what's coming which is Every single account is going to lpl and so every workflow is changing, every tools the advisor maybe had integrated with their current platform, all have to be reintegrated with new platforms. It is better than most. A lot of the folks, if they've been in the RIA channel for a long time, we take for granted that we have a lot of flexibility. But independent broker dealer reps, a lot of times they're kind of, you know, walled gardens of sorts where it's, hey, you're independent, but you're not really independent. We're going to tell you what you can use for technology and who you can use for custody and which money managers you might have access to or alternatives or et cetera, et cetera. So there's a curated kind of component and again, all of that's then likely to change. Right? Because the structure that LPL is going to use and is pretty well known and you know, huge platform, well over trillion assets. So yeah, it's one of these things where I do feel bad for the initial kind of shock that probably these advisors are feeling, but I think you and I both would agree that a good time to actually be independent is probably the, you know, like the lesson here in being sold from one IBD to another and being told what you can and can't do doesn't feel very independent.
[00:06:19] Speaker D: I couldn't agree with you more. I oftentimes draw the analogy and maybe it's not the best analogy, but draw an analogy of you're in prison if you're at a, if you're an employee of a broker dealer, you're like, well, way deep into the prison. And when you're in an independent broker dealer, it's like you're in the yard of the prison, but you're still, you can walk around a little bit, but there's still these walls that are like, you're not coming outside these walls. And basically what's happened now is that the warden said, well, you're moving prisons. Like we're shipping you from this prison to this other one. And it's, well, maybe you should just Shaw shank your redemption. Shawshank redemption your way out of this thing and be fully independent in the RA world. Yeah, right. I mean, that's the, that's the way to do it. So question for you. What do you think about the valuation? 8x is the number that came out. I'm curious if you think that's normal or if you. Because I guess I was thinking it's a little low, but which then Made me speculate as to if that somehow is a result of what we're going to have to pay all these people a bunch of money to stay or is that something to do with this $93 million SEC fee that's happening or, or if you think, hey, 8x is actually like a perfectly fair price.
[00:07:30] Speaker C: Yeah, and I think, I doubt there, I doubt the regulatory concerns have had any influence on price. I think those are always disclosed in deals known about and a lot of times there'll be a portion of the purchase price retained and over the next two years it'll pay out any either on a current items or even future based on historical, you know, kind of, you know, risks, if you will. So I don't think there's too much there. I suspect the, it's more the former that you mentioned. Like I think there's probably two things influencing the valuation. I think it's, it's, yeah, that there's, this is different than like, you know, when you see about an RIA firm buying another RIA firm and in that context the owner of the RIA has the direct client relationships. They're making the decision to sell to a aggregator and you see like, you know, 99% retention. The clients come along because the advisor that had the relationship was the one who sold and got paid. In this world, these broker, these advisors to my knowledge are getting paid nothing. Right. Like there's no incentive for them to say oh I better make good on this purchase price. Like a very large percentage of these dollars could leave. And there's really nothing outside of LPL paying, retention, you know, bonuses for loans, whatever, all the other different incentive structures. There's no other way to guarantee that these advisors are motivated to come along the deal. So there's a lot. A broker dealer selling is naturally going to be at a much lower valuation multiple whereas an RIA, if there was such thing as an RIA with 285 billion, which I know there's a few of them out there, but they would probably sell for 25x or something like that. And a lot of it's because the assets are stim and there's all sorts of incentive over alignment.
The. So yeah, it's hard to know what the cost is. The other component I would speculate on, I don't know because Commonwealth is a private business but reasonably good chance that they had slow growth. And so when we think about the way that earnings multiples are calculated, combination of the durability of the assets, in this case you could put a Question mark on the durability of the assets. The second portion would be how much of it's fee based versus transaction based.
We don't know what that is exactly the breakdown but broker, dealer, good chance there's a meaningful transaction or even net interest income component to this, you know, versus an RA firm to selling on a almost always a fully recurring revenue basis. And then the last would be that retention risk of the actual advisor. So I think you get all those things aligned eight times. Probably doesn't feel that unusual because I think transactional businesses, it's hard to get much more than 8 to 10 times. In this case it might be again a slightly penal amount because of the fact that there's also some serious like retention risk.
[00:10:14] Speaker D: Yeah, exactly. I think that makes sense. So you think it's just in your opinion the reason this is happening? Because you know, it's kind of interesting, right? If you go I'm not sure if it's still live but you go on the Commonwealth website like I did yesterday and they there's a huge section on here about how we are, we're the only one that's privately owned. We, we are proud to be private. And it goes so far as to say we will never sell. It's like we are not selling. And so just curious as to what changed. Right. It's like how do you go from that? It feels to be like so proud of it that like it's on my website like we are not selling. We're going to be remain private to all of a sudden lp like not only did we like not sell to Dynasty Financial or we didn't sell to like we didn't sell to another service provider to your point, because that would be one thing, right? If oh someday Uptick Partners wants to sell to another RA aggregator and nothing really changes. And at this point it's like they're just providing the service to sell to another custodian. It it seems is a pretty bold like pretty big move. And so I'm curious as to do you truly think it's just they just wanted liquidity and.
[00:11:26] Speaker C: Yeah, there's probably a time in all of our lives when we would have made statements like, like that would say I'm never going to do this, you know. And then you know, someone dangles almost $3 billion in front of you and you also realize they're not getting younger and what are my other options? And before you know, it's like, well maybe it's the best possible solution. And in the end these are businesses Business decisions. And I think that again, maybe should, maybe part of why they, they grew, you know, to a few thousand advisors and had a lot of loyalty from those advisors was because of that, that message, you know. But the reality is, I think advisors would be foolish to, to believe that kind of stuff. I mean, that'd be like literally you or I saying never selling ever in my lifetime. It's like someday we'll be dead. Someday we'll have no choice. Right? Someday, you know, things change. Right? So I think that there can be a, an intent, which I believe was probably pretty honest with that when those were written on that site. Intent is to remain fiercely independent advocates for advisors for ever. The real reality is that forever is a long time. So I don't, I don't fault them for selling. But I think, you know, now at the end of the day, like advisors have decisions they have to make because what's on that site turned out not to be true. And you know, decision is pretty straightforward. It's like, you know, do I go to lpl?
Probably a lot of people will, or do I go to a different broker dealer? Some people probably will. Or do I say, you know what, maybe this is a sign of it. I think there's an awful lot of broker dealer reps, registered reps, and IRS that they've been kicking around going fully independent, starting their own RIAs or maybe even being hybrid or something like that for a long time. And this might be like the hair that breaks the camel's back in the end. It's a marketing message that they probably believe to be true until it wasn't.
[00:13:15] Speaker D: Exactly. So what are your thoughts on the LPL technology? I know that's what sparked this conversation, I think was, was your donut post on there, you know, and all of that, you know, so kind of curious because as I mentioned, I've got this other person that I'm talking to that was at Edward Jones, I think two years ago, went to lpl. Two years in is like I'm paying the money back and breaking away to go ria with altruist and primarily because the technology is so bad, in his opinion. And but what's ironic about that is I talked to a bunch of other people who say, well, LPO's tech like that that's what their selling point is. Our tech is so great, we invest so much money in our tech. And I just like, how could these things be so opposite of each other?
[00:13:57] Speaker C: Yeah, no, I, so yeah, the I, I, I hope I wasn't being too you know, forthrighted kind of. My views on their ui, I mean I can't tell, I've never been an LPL rep, so I can't like say from experience is a lot worse for me. I just kind of look at it, watch the demo videos and kind of scratch my head a little bit. But I think so a couple things on the platform itself I think, you know, so one, how they've navigated interest rate fluctuations. I mean they've operated that business incredibly well and the stock has performed well in reaction to that. So I think, I think one, I think it's worth noting like LPL is a very solid company from a business perspective. Pretty big successful companies that are not very good at technology. Like that's okay.
I don't know if you've been on the Berkshire Hathaway website lately, but it hasn't changed in 30 years or whatever. So you can be very successful not having the world's most beautiful elegant website. What I think is interesting about our industry is that technically platform businesses like LPL or like mine, we are B2, B2C platform. So we have to keep in mind that there's two users, you've got the advisor user and all of the related staff and then there's an end client somewhere in relationship. And so I do think like we have to be a bit thoughtful about the user experience because whether we liked it or not, there's a slew of consumer facing brands, fintech companies, etc. That they have really fantastic design and very, very innovative technology. It's very easy to use, it's very fast and snappy and you know, pleasant and so forth.
I don't know that anybody would ever categorize the LPL platform in that way. It doesn't look very elegant and it's not, doesn't look particularly snappy and I don't know what the other consumers feel about it but I think most consumers, if they like said hey, like how do you feel using this versus something else? They might go ahead and leaves leaves a bit to be desired. But I think that the notion that like spending a lot of money on technology somehow makes it good is, is quite the misnomer.
The just speaking again from experience I can say that the Altrus platform is about five years old in terms of the core technology. The clearing technology is five years old. If we, if there was if for a reason, if we made this, if we looked at our platform and said oh my gosh, you know what, times have changed and technology's moved really Fast. And we need to re architect our platform. We need to re platform the technology itself. It would be a massive undertaking no matter how big your team is, how much budget, just because what happens is the surface area of these platform businesses is very vast, you know, so it's like it's all of the account types you support, all the security types you support, all of the user Personas you support. I mean there are oftentimes thousands of screens that live within your web application and maybe hundreds in your mobile applications. And when you do something that touches every single page, every interaction, I mean it is a large scale dll. They've been built, their plat platform was largely built, you know, I don't know, 40 years ago or something. So it's most likely some combination of a large monolith. So like one really gigantic code base that's been around for a long time. Probably very stable but not easy to change. And then over the years they've probably layered on these technology as a single service, if you will and you want to make some changes to how elegant you opened accounts, you just change that one segment, right? You don't have to replace platform, the whole thing. All of the big firms, right, they have these monolith like their original code bases are very old and typically quite stable but they'd be very hard to change. And so I think that you know, this is, this is, you know, just the nature of what they have. And it's highly unlikely that anytime soon there'll be some big massive platform enhancement, right? It's like, you know, this is the platform they have. There'll be some iterations and slight improvements. Maybe the new app, it gets updated from time to time. But at the end of the day it's going to be hard for them to ever innovate. We will have the same problem someday, right? So at Altruist, I'm not trying to say like oh, we're somehow new to this, just our day will be 20, 30 years from now. It's like probably going to be a long time and hopefully more thoughtful about using modern architecture and evolving it along the way versus like letting it get big and then being stuck in a weird spot. I don't, from what I've seen, it doesn't look all that great. You know, we hear all the price same things you do. Advisors who break away from independent broker dealers and usually in fact we had one, a very large firm, multi billion dollar, one of the largest firms on LPL and watching them react to a demo of Altruist Was like the craziest thing ever. Like, they just were completely shocked that this even existed because again, they've been working for 20 years on the client works, you know, surprised in not a good way when they go to see the new technology that they're going to inherit. And again, I wouldn't say that Commonwealth was like, they certainly were no Robin Hood in terms of like their innovation and ease of use. But it was, I think, well respected in comparison to most other broker dealers.
[00:19:08] Speaker D: Yeah, for sure. Well, so if you're, I mean, I'm for sure of the opinion that it's undoubtedly what you guys are doing there is the future. There's no doubt about it. And every time I ever open up an account for a client at Altruist, I'm always just blown away by how it's like, how could it be this easy? Right? It's. And how could it be so hard elsewhere? What you guys are doing is really incredible. And I think that anybody who's watching this video owes it to themselves at a minimum to go and do a demo with somebody and see, understand this is what, this is what 2020 technology looks like. And then let's go compare that against what we have or what's coming from any other frankly, custodian, it's pretty, pretty eye opening. So I guess in the interest of time, I don't, I don't want to keep you much longer, but I think that if you're a Commonwealth advisor and you don't want to go to lpl and in our opinion the natural choice is, well, you should go. Ria, if you don't want to go to lpl, at least that's my position. What's the pitch? If you want to give them the 30 second why altruist pitch.
[00:20:17] Speaker C: Yeah. I might be the world's worst salesman. Yes. I don't have a killer pitch. But I would say like, you know, in, in like the first order I think people should do is, is they should, they should obviously explore their options and understand what it means. And so, you know, that's where I think like the work you do at Uptake can be, you know, particularly valuable. Like because it's more than just a custodian. I think obviously a really critical part. It's the whole like, how do I register? What's the, what are the bds sometimes will try to scare the hell out of you. You know, they'll be like, you never want to go run your own firm. It's way too expensive, the risks are way too high. So I think, like talking to someone who's been there, done that, runs their own firms, coached advisors through it, like, that's gonna be step one. And I think what people will find is, I'm sure you agree, like, it's not all that scary. In fact, it's quite exhilarating in a good way. You know, like this, like, you know, kind of true independence is pretty awesome. Um, and then, yeah, as the custodian, you know, the, the things I can say is that, like, look, I've been, I've been in the shoes of the advisor. I started my career as an engineer turned advisor. My first experiences were in the early 2000s with TD Waterhouse. Back then TD Ameritrade. Now Charles Schwab. I could not believe 20 years ago that, that you couldn't open an account online. It seemed like the silliest thing because consumers could do that. Like you could do it on E Trade or the Ameritrade website, or even Vanguard's website website. You can go online, open account, fund your account. You don't have to talk to anybody. You don't have to do any paperwork.
The fact that advisors today are still doing things with DocuSign at best, waiting weeks to fund accounts. When anybody in America can download the Robinhood app, connect their bank account, put 10 bucks in it and buy $10 worth of something and do it all in maybe two minutes or less just should share what the bar should be for advisors not switching that. We want to be trading whatever election betting and yeah, sure, brackets and all that stuff. But the point we're being about around the elegance and ease and simplicity. So really that was the first principles approach we took when building Altruist was yeah, it should be incredibly easy to onboard entire households. They should just take a couple clicks and be maybe a minute or less. The client experience should be super fast and easy, like just tap a couple buttons on a mobile app and be done. And funding the account should be just the same, like doing an acap. The money should show up in just a couple of days, not in weeks. And then other things that I think are first principles. I'm like, why are advisors not allowed to trade fractional shares? It just made no sense to me. The reason why is most of the firms, they rely very heavily on net interest income and they rely very heavily on 12B1 fees, another type of mutual fund revenue. So they don't really want you to very easily be able to trade fractional shares. That would reduce the amount of cash and client accounts, which reduces the Spread income they make. And it would allow faster adoption of individual equities and ETFs across clients, all account sizes. But these are the things I think if someone, if they go in, they look at altruist, they'll go, wow. Like this is just how it should have always been. If you're a fiduciary trying to drive the best possible outcomes for your clients. So better outcomes and better experiences. And I go on and on about the other features. Just again, I think the general feeling that most advisors get is this just feels the way it's supposed to feel and realize that because it didn't exist for us, like everything was sort of accepted as, you know, hey, it's been this way for 20, 30 years and everyone does it this way. And then all of a sudden we came along and just said, well, I don't know, maybe your fee billing should require a third party software where you download a file, then you upload it, then you run a query, then you generate another file, then you upload that to your custodian, then four days later, next, then a bunch of accounts like get busted because they had a monthly withdrawal and the cash B. I mean like that is the craziest stuff I've ever heard.
[00:23:53] Speaker D: Right?
[00:23:53] Speaker C: That, that's sort of industry that operated. Yeah. And again, an altruist, you just create your fee schedule, assign it to it and it's just done like you don't have to do it anymore. So a lot of the things that we do just, they save people a ton of time, a ton of money, drive better outcomes for clients. That's the genesis of the business. But it was all born from frustration of being an advisor and kind of scratching my head being like, why is, why are these things so hard? Why are things so challenging and they really don't have to be. So anyway, that's the altruist pitch in a nutshell. Cool.
[00:24:20] Speaker D: Awesome. So any inside baseball, new cool things coming, structured notes, alts, any of that kind of stuff? That's.
[00:24:28] Speaker C: Yeah, we're working pretty hard on alts right now. We're trying to. I think people probably get tired of hearing me say this, but like most of the things we do, I would operate and what I refer to as first principles. When I think about something like alternatives or notes and other things like that, my mind kind of goes, well, you could do it like everyone else or you could ask yourself, is there a better way to do that? Is there a simpler way that's more cost effective to the end client and maybe more Cost effective to the advisor. And so the way we're thinking through ALTS is very much that way. We're going to build direct custody instead of outsourcing. We'll build direct distribution instead of just using a third party platform platform. So, so that's currently in the works like you know, literally big, big, big project for this year.
You know, a bunch of other kind of things working on this year trying to make tax management incredibly easy. A couple of incremental new releases on our way to hopefully by year end having full asset location, household level rebalancing. Just ways to then automate things like daily tax loss harvesting and maximizing minds after tax returns and doing it all fully automated. I think that's kind of the other thing I'd say thematically is like we don't just build stuff the way other people build it. We kind of look at it and say well is there a way to do this with a very high degree of automation and precision. So advisors can deliver these amazing outcomes and experiences to clients but they don't have to work that hard to do it. They can focus more on relationship and less on keying in data or like sitting behind a computer. So those are a couple things. This year we have a bunch of AI tools that will be launching again. We've been trying to think about it more in a first principles perspective like where can AI actually drive meaningfully better outcomes from a business owner's perspective and better outcomes for clients. And so I think there's some table stake stuff out there that exists like AI note taking a few other things like that which is great that those things exist.
Where you really want things to go in this business is in a more agentic way. Which means what if you could just hire an AI agent directly inside the Altrus platform platform you don't have to worry about going externally and it replaces the need to hire human beings for certain things or just makes the human beings you have way better. Magnifies their ability to make an impact by 100x or something like that. So everything from para planning to analysis, tax analysis, things like that. So yeah, you'll see the first iterations of AI coming out relatively soon. And then yeah things like alts, big big project this year and, and tax management, a big theme for the year. So there'll be a hundred other things too but there's a couple that we top of mind that I think people will like a lot. Yeah instructional, not what we will get to by the way but that'll come after all it's most likely. Again, we kind of looked at the notes platforms and we're like, gosh, there's. It just seems like there might be a better way for people to be able to offer structured notes in a way that reduces the amount of hands in the cookie jar. Because right now that's the problem with a lot of these, like these alternative asset classes and structured products is like, a lot of people want to get their hand in the mix. And like before, you know, it reduced a lot of the end client impact. So if we can try to remove some of that friction, I'll just make it easier for advisors to, you know, kind of get direct access to products, pay less, you know, kind of in hidden, kind of sneaky fees, kind of in the distribution of these things, which will in the end result in better client outcomes.
[00:27:32] Speaker D: Yeah. Yeah. Very awesome. Well, I'm really, really excited and again honored that you were able to join us. And I think that hopefully this will prove to be very valuable for anybody that that listens to it that is thinking about going Ria and hopefully they'll contact us and. And either, you know, we can connect them with you guys or they'll go directly to you and do it that way. But I think that you guys are doing something really special there.
[00:27:55] Speaker C: So you're so kind and appreciate the efficacy and the chance to jump on with you. And hopefully there's not like gigantic M and A transactions every weekend. But this was a fun one and I'm glad it brought us together to chat today.
[00:28:06] Speaker D: Yeah, absolutely. Well, thank you so much, Jason, and you have a wonderful rest of your day.
[00:28:10] Speaker A: Thank you for listening. We hope you enjoyed the podcast. Please subscribe to our channel. You can find more of our episodes on YouTube, Spotify and Apple Podcasts. And check us out at uptickpartners.com where you can learn more about how we help breakaway advisors just like yourself, find independence.
