Beacon Flash: The Art of Differentiation in the Advisor Marketplace – A Conversation with Ken Hullings, LPL Financial

Welcome to the beacon flash to go to podcast for enterprise wealth management professionals looking to stay ahead of the curve hosted by Chip Kispert, Managing Director of Beacon Strategies. This podcast explores the future of the industry and the most pressing issues facing today’s top leaders. Join us each week as we sit down with industry experts to discuss the opportunities and strategies for success.

Chip

Alright, it’s Chip Kispert. I am so excited to have Ken Hullings with me today on the beacon flash podcast. Ken welcome.

Ken

Thank you, Chip. It’s really really excited to be here. Appreciate it.

Chip

You know, I got to know you a little bit last fall in our RA at a roundtable that we had in Sonoma and I really treasure that time. I’m really excited to have you on the podcast because we’re looking at a really a changing ecosystem, a changing environment when it comes to to the wealth business right and your doppio you guys are leaders in so many ways within the space. I’m curious, from your perspective, how is the advisor marketplace changing in 2023 and 24.

Ken

That well thank you again for the invitation to the roundtable and I love how you went about posting it for those that have not attended. It’s not what I would call a typical roundtable people actually participated and talked and shared ideas. And so it was it was fantastic. The advisor marketplace as it always does. Chip seems to be shifting, and we do sit in a interesting purge of the industry at LPL. We attract more advisors than any other firm and so through that and I think our team’s had meetings with over 20,000 advisors last year, we get to hear a lot of what is on their mind. What are they worried about? What are they looking for, and we are not a perfect firm. We definitely don’t have the market cornered on all of these ideas, but some of the things that we are seeing is one there seems to be a pent up demand. of advisors that are looking at different options in the marketplace during you know, maybe the middle to early part of last year when the market volatility things kind of put on pause. But we’re seeing what we call churn. So the movement of advisors is coming back. So it’s it’s back to you know what we would call a maybe even normal market which is around five to 6% of advisors in motion every year. What’s been interesting, though, is the amount of movement from independent firms, which historically has been around seven or 8% has now dropped to about 4%, and the movement coming out of the wirehouse and regional firms, which historically had been about 4% is now trending to about 7% And so that’s been an interesting shift. And I think there’s a lot of thoughts around why that might be. And maybe the final thing I would say just about the advisor marketplace is as you know, from the work that you do, the advisor behavior ultimately is driven by end investor behavior, right so advisors are always trying to be ahead of what their clients are thinking about. As we see a world that is moving more towards digital more towards self service more towards on demand. We continue to see advisors looking for firms, that are ahead of that curve – digital tools, aggregation, etc.

Chip

Sure, so deconstruct that a little bit right. So you gave us a lot you give some interesting trends. There. You said you also talked to probably 20000 advisors last year, which is incredible number quite frankly, what what are a couple of the hot buttons like what are what are three or four items that you have seen through the filter that seek them out?

Ken

I would say the the big ones are probably not going to shock you. You know what I was going to sum it up, it comes down to what we might call workflows. Right? The big hot button is Do I have enough time to serve my clients in a way that is going to allow me to build the relationship I have with them and deepen the relationship. So time is number one. And so if you think about the integration of all of the workflows that impact an advisor and their client and everything from CRM to an account proposal to a financial planning tool to an account opening, move money reporting, billing, etc. They’re looking for efficiency there, and then they are looking for how do I deepen my value, which today comes down to a lot of maybe planning, right how am i How am I exposing my clients to a deeper level of conversation to really understand what’s important to them, and then followed up by Do I have the solutions, either the platforms or the products to actually deliver on what they need? And so, you know, I would say most of the advisors that we engage with are in moving for some of the esoteric conversations that maybe the media puts out there like crypto or what have you, it’s blocking and tackling. can I provide my clients a great experience? Can I get to know them and their families deeper than anyone else? And do I have solutions that can help them achieve what they’re looking to achieve? I don’t think that’s ever going to change.

Chip

I don’t think it is. It’s interesting, because if we look at the concept of compliance, we look at the concept of tech stack, right? All this has come into play. Right. And, you know, the interesting thing that I’ve been doing a lot of thinking about this lately, is that’s all become table stakes. Right? And differentiation isn’t necessarily what technology you have. It’s your ideas. It’s as you’ve talked about the journey, right? And sure, there’s some tools that can help you. But a lot of a lot of, you know the value that you all delivering and for like you is that infrastructure that those services to allow them to differentiate themselves the way they want to.

Ken

Exactly. I found a lot of advisors. They don’t want to worry about the underlying tech stack or the regulatory world. We’re in a blessed position where we have a job where we serve advisors directly. And then we have a channel that I helped lead where we serve businesses that are in wealth management. And what we’ve seen from those businesses, whether they’re financial institutions or product manufacturers or other broker dealers, is they’re saying the same thing that you just said, which is, hey, 1015 years ago, I thought that running the middle office and running the back office and owning the risk was a differentiator, but now it’s a commodity. And it’s a commodity that I need a ton of scale to actually do well, and so that’s an interesting trend at the firm level. That I would say we’ve seen over the past probably five or so years, and I think that’s going to continue as well, whatever you and I might scale today. I don’t know what the right number is. I know it’s larger than it was yesterday. And I know tomorrow is larger than it is today. And I don’t know if that trend is going to stop for a while.

Chip

But as you well know we spent a lot of time analyzing types of projects and learning these configurations together. This is expensive and guess what it’s it’s like almost like a keep up with the Joneses and never can keep up with the Joneses. Somebody’s always gonna have more life. Right? So I think that’s a great point.

Ken

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Chip

You alluded to it a few minutes ago. Tell me a little bit about kind of the LPL model that you’re working with and how is that different from traditional clearing and custody? They did. Some of your competitors that we’re used to. And maybe I’ll give you how we see the world a little bit because I think that might be instructive in terms of the solution.

Ken

We’ve started to construct and rollout. We think there’s wealth management firms that are really running into one of two camps. So there’s one camp that is investing a ton of money into technology and digital tools in order to disintermediate advisors from their clients. So they are trying to demote the role of an advisor in that trusted relationship. And I won’t name any names, but those are those are large firms that are well capitalized and well run, but that is their strategy to the most advisors in the ecosystem. We are in the other camp and we share that camp with many of the great firms that you and your firm work with where we believe the best outcomes for families comes from working with an advisor. But at the end of the day, if you’re an advisor, you can’t just rely on having a great relationship you need to be able to compete with the digital tools and the experience that those other firms are going to deliver. And so we think we sit at a pretty interesting point where we are at scale. Last year we invested over 300 million in new technology capabilities, not keep the lights on not upgrading systems but new capabilities. This year. Our investment portfolio is north of that and we expect that that will continue to rise and that’s investment on behalf of our clients, which are those in the advice business who are competing versus some of those other firms. And so maybe that’s kind of a high level thematic overview, but where I think our solution might be a little bit different than what has been in the industry in the past is back to what we were talking about a few minutes ago. The magic in the business happens in the front of the house that happens between an advisor and their client, sitting at the dining room table sitting on a zoom call. What matters and the magic happens between the firm and their leadership and the experience they provide their advisors and in our view that’s becoming more reliant on what we recall the middle office, kind of the broker dealer operations in the call centers and the compliance and the back office declared. Custody and clearing are really important functions in being able to deliver a great experience to clients but where our offering is a little bit different is we do the middle office. So we are not just a clearing firm. We don’t have a vertically integrated Wealth Management partner. So our broker dealer or custodian or clearing firm, they have our own advisory platforms and their own tech stack that also integrates with a lot of the great third party tools out there because there’s no way to deny that the FinTech industry is amazing and driving some great innovation in our space these days. But because we can show up in all of those key components. It allows a business and space to leverage a partner rather than stacking up a list of vendors. And we think over time that allows us to provide more value allows our clients businesses, their time, energy, and capacity focused on that front of the house, the relationship they have with their advisors, their team and their relationship that we have with the end investor. And so that’s a little bit I think, how we’re trying to solve the problem a little bit differently than maybe that.

Chip

That’s interesting because I listen to that and maybe I read between the lines a little bit. I’m also hearing how potentially, you are also working to mitigate risk for a lot of these firms that you’re doing work with, whether that be from a compliance perspective or or that tech debt right that tech stack deck and that’s a big deal. Like really deal.

Ken

So that is a big component of it. We we talk about it in a framework here of kind of up, down, down, right and so aspirationally we think that our solution and wealth management business to enhance the experience they provide their advisors, enhance the experience, they provide the end investor and then reduce their cost to run the business. A lot of that is kind of the middle office costs, as well as the ongoing investment in things like technology, while also reducing and in many cases, removing a lot of the risks. They always maintain the reputational risk, right where essentially a white label solution, but most of the operational risks and the regulatory risk lands on us because we’re the underlying broker dealer. Fairly simple people here, Jim.

Chip

So, Ken, let’s switch gears a little bit here. So you know, as you’re talking to your customers and prospects, right, what’s keeping them up at night?

Ken

I mean, above and beyond kind of the normal market movement, political uncertainty, economic uncertainty, how that’s probably table stakes for what keeps a financial adviser or wealth management firm up at night. I would really go back to one of the items I commented on earlier is there are well capitalized firms trying to get between them and their clients each and every day. And in some cases, their current business partners have those firms that are working to be the brand that is first and foremost in the mind of the clients. Again, that’s one of the things I love most about LPL. But we aren’t the only firm there are many firms in the industry that put their brands behind the brand of their clients. But that’s one of the things that we hold dear, is that the trusted relationship is between either the advisor and the client or the firm that that advisor is with it’s not you know the custody and clearing firm with a tech stack that’s, that’s behind that the clients don’t hopefully they get value from those firms, but they don’t need to know about those firms. And so I think that many of our clients, both the enterprises, and the advisors worry a little bit about some of those firms that are out there spending a ton of money to again, I don’t think this is too strong of a word, devote the moat value of the advisor and we are so full throated and wanting to promote the value of advice. And I think that’s something that our clients and also we think about fairly often.

Chip

Interesting, interesting. One of the things we always love to look at is what’s coming down the pipe right? What’s your next big thing that you’re excited about as it relates to the enterprise wealth management world?

Ken

Again, I might be single, so it’s not going to be a knock your socks off. One of the segments of the business that we support and have supported for years. Our CEO Dan Arnold actually grew up in kind of the financial institution wealth management space, when I think about that space is is ripe for modernizing, but maybe the way that I think about it, the mix of brokerage business compared to advisory business is what you might have seen in the independent space 10 or 15 years ago, while at the same time all of the studies show that customers have a very high level of trust with their local financial institution. And so I can be a partner to those firms. One of the things that we spend a lot of our time thinking about is one, how do we help them move towards a more advisory based conversation with those customers and to I think the perception of being an advisor working within a financial institution hasn’t always been the best perception. And I think that there’s a way to really help certain advisors see that that is a great place to build client relationships and deliver really good advice and outcomes for clients. And so I actually think that’s an interesting space to think through. It’s kind of a baby sleeping part of the market is sitting on a treasure trove of opportunity for the right type of advisors, the right type of leadership at some of these businesses, it can really skyrocket in my opinion.

Chip

Interesting, interesting. I love that. That’s terrific. All right. So we’ve gotten through five questions here. We spent some time talking about those, but we always like to do we kind of go through those just to get your final word. 60 seconds to share your thinking about an aspect of the business that you see coming so you get the final word.

Ken

Thank you. This has been a lot of fun. It’s not surprising after what I experienced that your roundtable I think the value that you and your team provide in the industry is is really important. So thank you for that. You know, maybe I’ll share an analogy that my team I think hates when I say that I will say it anyway, and it was first shared with me about the San Antonio Spurs, which if you recall, was just a good fundamental basketball team. And Scott Van Pelt on SportsCenter one night described them as all cupcake no icing. And that’s what I tried to ingrain in my team, and I think that’s what we’re building here. We want to be a cupcake. And when our clients whether it’s a health business at a bank, whether it’s a wealth business at a product firm, another broker dealer or an advisor, they get to decide what the icing is. What is their special offering to their client base to their community, what makes them attractive, but they should never have to apologize for not having a new cupcake underlying that specializing. And so that’s what I would share with you and your audience is the icing is what matters. It’s what makes you different, but it has to be paired with a really solid cupcake that you’re never going to have to apologize for. And that you know is always getting better and better. And and so that’s kind of our maybe aspiration and again, my marketing folks don’t love when I described our firm as a cupcake. It works in my head.

Chip

I love that that’s that’s, hey, you can set out a cupcake and ice and kit right for your customers on the new customers I thought was great. Dan, thank you for joining us. We’re grateful to have had you share some of your thoughts about the business. And I look forward to hearing more about what you guys are doing.

Ken

Thank you. It’s been a pleasure. I appreciate the opportunity.

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