#FA Success Ep 345: Differentiating With Institutions And Ultra-High-Net-Worth Investors As A Serious Investment Firm, With Lori Van Dusen

Resources Featured In This Episode:

• Lori Van Dusen
• LVW's Governance Calendar (download)
• LVW’s Asset Allocation Bubble Chart (download)
• LVW Advisors
• SPIN Selling by Neil Rackham
• Orion Risk Intelligence (previously HiddenLevers)
• Aidentified

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Full Transcript:

Michael: Welcome, Lori Van Dusen, to the "Financial Advisor Success" Podcast.

Lori: Thank you. Happy to be here, Michael.

Michael: I'm excited for today's episode and talking a little bit about what it's like to build an advisory firm that, I guess, as I'll put it or even as you put it on you site, that takes investing seriously. And not that so many of advisory firms that run on an assets model don't take their client portfolio seriously, I think we all do, take the fiduciary and stewardship responsibility seriously, but I find a lot of advisory firms these days, even when we're still operating on the assets under management model, you have to go 3 pages deep on the firm's website to actually get to the part where they manage investments. So, there's almost like, "We'll lead with anything but the investments because we want to talk about the financial planning and the wealth management and the rest."

And just I was fascinated, when we were 1st looking at having you on the podcast and I was looking at your website, and you have just this opening statement on the home page of the website, "The Art of Serious Investing is a Commitment," and that you just sort of lead with this framing of, "we're serious about investing here." And then, as you get deeper, you do a lot of financial planning and wealth management and have some pretty cool deep stuff with the institutional world, that we'll get to talk about as well, but this idea of, "It's okay to lead with being a serious investor." And just I'm fascinated that you seem very comfortable in that space just in an industry that I find is shying away from that in recent years.

How Lori Began Her Career In The Financial Services Industry [05:09]

Lori: Yeah. Very comfortable, very grateful that we have the history we do. So, I started in the wirehouse industry at Shearson Lehman Brothers, and I was actually hired by Lehman Brothers in 1987. So, that might give you a little indication of why we do take investing seriously. I started my training in the World Trade Center and really built a business around understanding the client first but also understanding all of the investments, what they were struggling with, where things were in their financial life.

It was a long time ago. And what I recognized back then is everyone was dialing for dollars and selling products, and I just thought, "I deeply need to really understand what people are doing, why they're doing it, what problems they're having, and what these investments are." And, we may get into it, but I had no background in investing when I started. They just hired me because I passed all the tests. And I had no idea what I was getting into. But once I was there and I started to have some success, 1 of my clients, and I was cold calling, everything was the desk and a phone, said to me, "What you do is really different. You look at the whole picture, you dig deep into the investments. I sit on the board of this," it was a large not-for-profit related to Cornell University, and he said, "I'd like to refer you in there."

And I didn't know anything about institutions or that kind of investing but that's how it really started. So, our roots were that first institutional client which was a foundation, pretty large foundation. I loved it. I started to study everything I could. I started to learn everything I could about different kinds of not-for-profits and institutional investing and grew a practice around that. And when you come from those roots, it's all about accountability, transparency, being good at what you do. You can't BS your way through a meeting, there are multiple decision-makers, a lot of them are professional investors. So, I guess I would say, in short version, I have been lucky to be around a lot of really professional investors who are luminaries, who've taught me a lot because they sat around boardrooms and I was the advisor.

And so, our history is really steeped in kind of institutional investing. And that's why we lead with it, because I think we are good at it and there are certain investments that should be very simple and easy. And there are others that take a lot of due diligence to understand and are difficult but can really move the needle and diversify powerfully in a portfolio or add returns. And I think that's just how we think. It goes back to 1987 when I started.

Michael: So, for those who aren't familiar, because podcasts in general has skewed more towards advisors that do so-called financial planning wealth management with individual clients and aren't necessarily as heavily in the institutional space...or, to the extent, they are...some of us may have small to mid-sized 401(k) plans but not necessarily sizable foundations in the context that you're talking about. So, help us understand, when you say things like, "We lead with institutional investing and we build this institutional-investing framework," what does that mean? Or, I guess, how does that show up as different than what you may be doing for the individual clients, like, the mere millionaires who have a good amount of individual wealth but are individual clients, as distinct from an institution and a foundation?

Lori: Yeah, it's a good question. I think we have integrity across portfolios but, of course, with individual or high-net-worth, ultra-high-net-worth clients, there's different complexities. You have to worry about taxation, for example. There's a lot of differences. But, from an investing standpoint, the powerful thing about coming from the background that we come from is that we understand the investments that a client or a prospect brings to us, we try to understand them fully. We don't fix what's not broken. We have learned more and gotten some of the best ideas from portfolios that are brought to us when someone was changing an advisor. And that comes from the institutional space because you would have to underwrite every single thing that an institutional investor owned in their portfolio, an endowment foundation, and these were usually colleges, universities, other kinds of not-for-profits that we've served over the years.

And then what we would do is keep the things that we thought were really good in the portfolio and give advice and be additive, we hoped, around those existing investments. So, don't fix what's not broken but add things that are powerful diversifiers or can add return. And I come from a music background, so, I say this a lot, I think in orchestration. And I've tried to teach people this, that you don't want to add so much to a portfolio that you dilute returns and you don't want to have concentrated risk so something is really amplified and goes wrong. And so, understanding the real source of return and stress testing portfolios is something we do across every client, whether they're a high-net-worth client, whether it's a million-dollar, 5-million-dollar, or 100-million, 200-million-dollar portfolio, that is the same. Stress testing, really understanding what's in there, not fixing what's not broken type of thing. 

Michael: So, I think there's an interesting framing there relative to...particularly where I feel like the individual wealth management realm has evolved in recent years. So many of us have tried to scale up the business by building standardized model portfolios, centralizing them into trading and rebalancing software, putting clients on 1 of a consistent set of models. That way the investment management can be centralized to investment management team and the advisors can focus even more on the financial planning. But it strikes me, part of what you're describing here, is sort of an implicit out-of-the-gate...yeah, if you're going into an institution, they're not coming to you in all cash and you're not ripping everything out. Or, at least, if you want to try, you're going to have so much more work to do with their investment committee to make the case of why each and every single thing in the portfolio is going to be replaced, that's just not how you do it. You come in to say, "No, no, no," you're going to look at all the things they have and you're going to try to find something that's an incremental improvement, that's how you add value into the picture. You can't come in assuming, like, "Oh, I got a great model portfolio for your long-term endowment, let me show you the current versus proposed of changing everything you own."

Lori: Yeah, you can't go into any situation assuming anything. Because I think one of the things that maybe I, hopefully, have taught people is, "Go in with a clean sheet of paper, look at everything objectively, and, again, keep the strengths." Once you understand the client...and, by the way, institutions and individual clients or families are somewhat similar in that the investments don't live in a parallel universe, they live in an organization for a purpose and there are stresses that you need to understand. So, you really need to understand the financials, the donor base. There's a lot of complexity. What's being lent out? What's their leverage? What kinds of lines do they have? What's real cash? What's not? There are so many things that you need to understand about an organization, just an individual.

And then you look at the investments, that's secondary. It's really important but first you need to understand the context and then you can solve a problem. Or you can recognize a problem or say, "Wait a minute, you don't have enough liquidity," or, "You have way too much of this or that," or, "Here's how we can improve it." So, that's similar but, yeah, we are not a firm that stuffs everybody into a model portfolio.

Having said that, we have embraced technology, we have embraced a lot of...process and technology that's made us a lot more efficient and tighter. Because it is difficult to customize everything, but you start to get into...anyone who's managing larger portfolios, no one comes to you with cash. Unless you're involved in a transaction, pre or post-selling a business. Then that's fun and easy. But typically people come to you with investments and you have to evaluate them and there's embedded taxes. So, it's really not that dissimilar in terms of approach.

Michael: So, when you're building this way...again, I'm just trying to think of this relative to how I think most advisors do this with an individual client context, you come to me, you work with me, I'm going to put all your investments into an account, or several accounts, that I'm going to capture as a household. In general, we try to put clients into whatever our models or allocations are. Maybe they'll have an "exception" because you have an existing legacy position, there's a lot of embedded capital gains that we can't sell right now. So, sometimes some advisors hold that in a separate non-managed account, sometimes we hold that in the accounts and kind of use it as a proxy for something else and build a completion portfolio around it but we've got the account. How does this flow in an institutional context? If a foundation comes to you and they have a 50-million-dollar account and they're pretty happy with 43 million of it but there's a 7-million-dollar segment that's not doing great, and you've got an opportunity to show something better, is this a 50-million-dollar account for you? Is this a 7-million-dollar opportunity because you're going to slot them into something for that 7-million-dollar allocation that improves it and that's your slice of this bigger pie? Help us understand just how the opportunity sets coming together, for those who aren't familiar.

Lori: Yeah, it's a 50-million-dollar client. It's always a 50-million-dollar client. Because we're always looking holistically. I don't think I can think of a circumstance where someone came to us with 50 million or 100 million and we only dealt with 2% or 5% or 10% of the portfolio. It's always, again, how the investments exist together. And we won't fix things that aren't broken but, in reality, a lot of times a lot of stuff is broken.

So, what I've found to be a distinguishing characteristic of our process and what we do with both private clients and institutions is to really start with the understanding of either the organization or the family and deeply understand...so, it's not different from many of your guests who talk about deep financial planning. We do that, we just do it on the organizational side as well and we stress test. And I learned something a long time ago, I don't know if anybody's ever brought this up to you or you ever came across this acronym, and I'll tell you where it's from, I spent a year at Xerox sales training out of graduate school because I didn't know what I wanted to do. And everybody said, "Well, Xerox is one of the best corporations," at the time, we're talking 1980, whatever, and I said, "Okay, I have no idea what I want to do, I have no clue, but I think I want to be in business." So, I spent a year or so at Xerox and I went through sales training. And I actually was pretty successful there. And then I went to Lehman Brothers, Shearson Lehman Brothers, but, at the time, they had this sales training and it was based on this acronym called SPIN. Have you ever heard of that?

Michael: Yes. I've heard of, like, SPIN selling and that framework.

Lori: Okay. So, it was "situation, problem, implication, need." So, you would have to really dig deep, it was how you could really understand who someone is, ask them all kinds of open-ended questions about their situation and the problems they're experiencing and what happens when you go through this. Well, taking that same kind of approach means that you really dig deep, and you understand the institution or the organization and then you evaluate the investments. And 99% of the time the vast majority of the portfolio is probably going to change. But you have private investments that are great, you may have some equity hedge funds or credit hedge-fund structures that are great that you come across. But most of the liquid stuff, historically, has changed. And that would look more a model portfolio. And that's still true today, if that makes sense.

How LVW Advisors Solves Investing Problems For Institutional Clients [19:27]

Michael: So, help me understand, I guess, just why there are so many opportunities and broken things in these portfolios? I'm just trying to visualize, it's one thing when you work with smaller foundations, because often they've only ever really been managed internally by a reasonably well-meaning board that had someone that had some financial background and they did some stuff but it's never really been professionally managed and reviewed, and just, once you come in there as a professional, there's stuff to change. When you get into larger...in endowments and foundations and the like, I'm going to presume a lot of the folks you work with you were not the 1st time there's ever been a financial advisor on the case. So, is everybody else just that bad that, when you come in, all the stuff y'all need to fix because your prior advisor didn't know what they were doing?

Lori: Yeah, that's a good question too. No, but...

Michael: Why is it so broken?

Lori: Yeah. Well, we are working with small and mid-sized organizations that everybody's wearing a lot of hats typically, so, that is our space. But I will say, previously in my history, we were probably working with more of the masters-of-the-universe clients that were bigger with very, very high-end sophisticated donors. But they also, way back then, remember, I started doing institutional advising, no one was really doing it and we're talking about 1990, and I didn't know what I was doing, and so there weren't a lot of competitors. But I was going in with this approach, "Let me understand your organization. Let me understand cash flows in and out. Let me understand your debt. Let me understand your struggles. Let me understand your spending from the endowment and what percentage of the operating budget it supports," all of those things. Nobody was doing it. And by the way, not many people do it now.

So, when you do that, it's how you get to, "Are the investments appropriately managed, given the real goals and objectives and needs of the organization?" But back then we were dealing with much bigger institutions. And I would say, maybe it was before this, but for me, in my experience through the GFC, we were completely disrupted. And we can talk about why, but it was a light bulb kind of went off for me that I cannot build a firm that transitions to the next gen with these kinds of master-of-the-universe big endowments foundation clients because everybody's in the space now. Fees are being compressed, turnover, there's so much fiduciary fatigue, your decision makers are changing all the time. "I can't do this with my team, 30 years from now there's not going to be a business."

So, our business now, just to be clear, is probably...and I might have this a little bit wrong, but 22 small to mid-size institutions. So, we're not talking about 500, a billion dollars, we never were in the over 1-billion-dollar space because those kinds of clients always had their internal resources and their own investment resources and CIOs. But we were the outside CIO for, I would say, mid-size institutions starting out when I started out. And now, I would say, we're in this kind of small-to-mid-size space where, yes, people need us to help them with all kinds of things beyond investing. So...

Michael: And just for those who aren't familiar, when you say "small-to-mid-size institutions," what kind of asset base are we talking about in practice?

Lori: 10 million to maybe 100 million. We do have larger clients than that, but I think that's really a sweet spot, to 150 million maybe, because those folks really need the knowledge and expertise of a team like ours that really understands. Now, and the other thing I guess I would say is what I've learned is to focus on the things that we care about, that we understand, so we're not managing...although I have done this, by the way, Taft-Hartley plans or municipalities. We don't do that. It's not-for-profits, it's in the areas that we really care about. If you've gone on to our website, you'll see that it's access to education, the arts, health and wellness. Mostly, that's where we end up. So, and not-for-profits in those areas, we really understand them. I can go into an art gallery and really understand what their issues are. I can go into a smaller mid-size independent school, or a public school, university and understand. And our team can. We can deal with a community foundation because we have experience. So, we're not all over the place and dealing with all kinds of institutions. So, I would say 10 to 150 million in segments around education, healthcare, the arts.

Michael: So, can you help us visualize a little more what kinds of, I guess, just problems are they having, or challenges are they having, that you have to build to? When you say, "We've built to a school system, we built to an art gallery," what are the differences in their needs and dynamics and how does that show up when you get down to how they're actually being invested?

Lori: Okay. So, let me try to give you a specific kind of little mini case study. A handful of our clients are college universities that are small-to-mid-size that are enrollment-driven. And so, when enrollment drops off, there's a lot of challenges and there's a lot of competition in education now, as you know. And I think, based on our team's experience and my own personal experience chairing college boards and being involved philanthropically in that space, we can come with a different kind of mindset and skillset around...we understand the kind of strategic issues that a college or university like that might be having. And so, we can rightsize the liquidity in their endowment, we can look down the road a few years and enrollment trends and understand if there's going to be more stresses and more spending out of the endowment and, for example, how much liquidity we need to have. We've been able to negotiate with bankers around lines of credit and other things and restructured debt with those kinds of clients because we understand them. We've been able to work with auditors because we understand deeply alternative investments, I hate that word, by the way, but we've been early adopters of all kinds of alternative investments.

So, you can really get inside of things. And actually, some of these small-to-mid-size colleges really could use the power that comes from putting in some kinds of private equity or private credit or real estate but they don't necessarily have the bandwidth in their administrative office to deal with the auditors and to really understand it or sell it to the board. We can do that so that they tend to look more like a school that they would aspire to be, in terms of their endowment and how it is positioned, without getting them in liquidity trouble. So, that would be one example.

Michael: And so, it sounds lots of dynamics around just really understanding their cash flows, as an institution, and whether and to what extent they're drawing on the dollars because it tends to be really long-term money. Which, on the one hand, takes you in a direction of very long-term growth and being comfortable with some illiquidity but they may have some very real cash-flow needs because the endowment really might support a core of what they're doing. And so, you're balancing... We do that with individual clients as well but it sounds even more so balancing some what may be very sizable short-term liquidity needs with what also might be some very long-term growth objectives that really don't have a liquidity obligation. And you deal with more of both extremes at the same time.

Lori: Exactly. Understanding what's restricted, what's unrestricted, that's where you can really get into...we have great people that are long-time team members, advisors, who are really good at this. But just understanding what can be earmarked as a really long-term investment, to your point, by just understanding the liquidity, the restrictions, everything, and then thinking outside of the box on some of the short-term spending needs and, again, understanding, in this example, what the enrollment picture looks like, what the donor base looks like. Is the donor base pretty solid and reliable? Is there a one-time large gift coming in? All of those things.

And this is not dissimilar to really understanding a sophisticated family or a wealthy family. Some of the money is short-term and some of it is legacy, and then setting up a family foundation. Because we have experience in the institutional side, these kinds of conversations are easier, I think, for us with families.

Why Lori Chose To Work With Small-To-Midsized Institutions [29:37]

Michael: So, you mentioned earlier that a part of what you do is putting these portfolios through stress tests to understand some of their exposure as well. So, what do you actually use for stress testing? Is this a technology, software analysis thing, you've got a tool that you…is this internal spreadsheets that you've built over the time? What does stress testing look like for you?

Lori: No, no. I mean, now...it used to be, it used to be...I joke it used to be me in a cubicle with a calculator. But HiddenLevers, we use HiddenLevers, which I think a lot of people are familiar with or have seen. I think it's a really good tool. So, we use that across the board, and that's been super helpful for committees, individuals. Yeah, that's...

Michael: So, what led you to HiddenLevers? There's lots of tech out there to support on this.

Lori: I wish I had the right person on this call to answer that question. But, you know, Rick Van Kuren who's my...I met Rick when he was 26, and I'm going to say he's close to my age, I'm older than him, but he's been with me a really long time. And he would be the one to tell you all the pros and cons around all the other stress tests. But I, from my standpoint, since I am the least technologically proficient, it's really easy to use. And it's powerful. So, we used to do all kinds of Monte Carlo, all kinds of things, but HiddenLevers is a pretty sophisticated stress test. And I think our team is continually looking at a lot of different technology that might be better or has decided kind of across the board...we could talk about technology, although it's kind of a scary topic for me, you never know what I'm going to say, but I think we have pain points around technology, as all firms do. And if something's working, just like my comment earlier, we don't fix what's working really well. But we do have other pain points around technology right now that we're kind of researching what to do.

And a lot of our technology...it was like, when I left the wirehouse industry and went first to a large RIA and then started my own shop, the first thing I remember thinking is, "Oh my gosh, there is no one at Smith Barney, Morgan Stanley now, or Goldman, or any of these places, Merrill Lynch, who understand how wonderful it is to be able to solve a problem using technology because these were all these closed architecture compliance-oriented firms." And so, we are constantly reevaluating technology. And, I would say, on our team we have some really smart people. Joe Zappia who came on board several years ago, Rick Van Kuren who, as I said, has been with me for like, I don't know, 30 years or something crazy. And we have a lot of younger people and they come to us and say, "Hey, I got a better idea," and we listened to it and we vet it. And once in a while I'm like a blind squirrel that comes across something technology-wise and I'm like, "Hey, let's take a look at this Aidentified thing or whatever," which we did look at and we are using.

Michael: So, I was struck by your comment earlier that you had started in sort of the mega institutions and didn't like the future outlook there, I guess. So, it's so competitive and so "what have you done for me lately?" or, like, "what were your performance results lately?" and the fiduciary fatigue of continuously managing a continuously rotating investment committee, that...it sounded like you would…sort of consciously moved away from large institutions and into the small-to-mid-size institutional space. Help me understand how do you not still live the same dynamic in a small-to-mid-size institutional world where I feel like there's still going to be a lot of living by your latest investment performance results and the "what have you done for me lately?" phenomenon. What makes it so different in small-to-mid-size firms or what are you doing to try to manage to that when you're working with small-to-mid-size institutions?

Lori: It's a good question. I think I would have said there's the small-to-mid-size space, if you can really help leverage the investment committee and educate the board and help the admin people, I think they see a lot more value in that. I think it's still a lot about...and I think this is good, I think that our culture is about accountability, fiduciary, people talk the talk, but we've had to walk it forever, showing transparent results, net of fees, doing all the things that you have to do as a fiduciary we've been doing since it wasn't a buzzword. So, I don't know that it's that different other than the fees were getting so compressed because there was so much.

I want to just go back and say that I didn't consciously choose to get out of that space, it happened because of a small little lawsuit that I was involved in with Citigroup when I left. My business was completely disrupted and I had to think about how do I create a stickier business that can transition to the next-gen. And I just find it to be, I don't know if this is the right way to describe it or my folks would describe it this way, but small to mid-size institutions are kinder and gentler and they do care about results and accountability and all the things the larger institutions care about. But they value us more. They value our experience, our expertise, and we want to help them get to wherever they want to be aspirationally and we're able to dig in more around the organizational issues than you can in a larger institution. So, I think that's the best answer I can give. I've never been asked that question, I think it's a great question.

Michael: Well, you make, to me, a powerful point of just saying, like, "Yeah, it is a lot about accountability for investment results, you have to kind of be good at it and then they stick around." And that's why your home page is the art of serious investing is a commitment that...I don't know, to me, there is this sort of simplicity, at least how I interpret your response, which is like, "Well, if you're really putting resources towards your investment process and you're showing up with reasonable results, then yeah, you can hold on to them because you have reasonable results."

Lori: Right. And there aren't many people or organizations that are out there that can say, "We've been doing this for 30 years and we have a team around it and we understand you." And so, I think it's a really good business but it is a business that requires specific expertise and resources and it isn't as profitable as the high-net-worth space. It's not. So, you have to accept that if you're in it.

But I think our history is unique, and that's where we, basically, started. Because, at the time, I took on my first institution, or was fortunate enough for them to hire me, I have no idea why they did that, but, at that time, I only had a handful of very high-net-worth clients that I'd closed. And I got in the space and I just loved it because you constantly were challenged, you constantly were being held accountable, which I really liked, and you had to bring people to consensus who were at odds. And I loved that about it. And I think we're really good at that. I think that's another thing that, when you have multiple decision makers, whether it's in an institution or family dynamics, I think it's really key to have that skill set.

So, I just thought it was super fun and challenging and I never could know enough. And so, that's why I got into the space and became somewhat well known in it and cared about it so much and tried to create a lot of best practices around it when I was at...whatever the firms were, all of the firms that started at Lehman, Shearson Lehman, that became Hutton and Smith Barney and whatever, Citigroup.

How LVW Provides Ongoing Service For Their Clients [39:10]

Michael: So, what does the fee structure look like? How does that actually work in the institutional realm, the wealth end of the sort of the proverbial 1% with break points as you get larger? What are typical fees in this small to mid-size endowment realm?

Lori: I think it's out on our ADV, I think it's all out there transparently. And I don't want to misquote it but it's somewhat similar, it's not decidedly different than high net worth it's just that, as you get up to 50 million, 100 million, but, at 100 million you might be at 25-30 basis points, something that, just to give you an example. I hope that's right, but yeah, blended. It might not be that, even that high, but it is lower for sure. And our industry, as you point out, we're kind of AUM-oriented. So, it is nice to get the bigger clients, from an AUM standpoint, but, when you're running a business, you're kind of looking at what's the profitability and what are the resources around all of these types of clients. So, I think there's a great deal of value to having an institutional business within an RIA. I do think it makes us different and it makes us jump higher, farther, have different investment ideas, think differently, be more accountable, be more transparent. I just think that's in our DNA.

Michael: And as you...so, I guess help me understand, just when I think nominally, getting 20-30 basis points on 100 million dollars, that adds up to a pretty good amount of revenue. So, what do you have to do for these institutions on, I guess, just an ongoing year-round basis? What has to get done that 1 institution that's paying a 6-figure check still takes that much intensiveness?

Lori: Yeah, I think it's that...well, first of all, I guess the statistics are that the average institutional client stays with an advisor for 4 years. So, the average high-net-worth client, it's much longer. And I think our average is much longer too, but again, there's a lot of turnovers so you do a lot of upfront work to understand the client. A lot goes into really all of those organizational aspects, understanding that, that I mentioned before.

At this point in our history, we're doing a lot of research on everything, so, our private clients benefit. There is a lot of complicated work that goes into understanding an organization and managing money and, most of the time, vetting all of these...usually, when you get an institutional client, there are complicated investments in the portfolio and, a lot of times, things you haven't seen before. So, if you go back to not fixing what isn't broken, you can't know if it's good or bad until you actually do the underlying due diligence and understand it. 

Michael: Because you're dissecting all their existing less liquid alternatives that don't necessarily have the most information out there, but you have to get a clear understanding of what it is if you're going to provide recommendations on it.

Lori: Right. And to be fair, again, if these are funds or something that we get familiar with, the next time they raise a fund or whatever and we have a relationship, we've gotten some fantastic ideas this way and we've learned a lot. So, I'll give you an example of a college that's our client, has been our client for many, many years, but, during...well, they hired us after the Great Financial Crisis and they had a liquidity problem and they were kind of upside down because they had too much in privates, and their solution, when we got there, when we were hired, was, "Well, we just need to sell some of this stuff."

And that's when we learned about secondaries. Because we knew, we had to understand everything they had and then we had to figure out how to sell it. It's not a public market, there's a secondary market, these are small to kind of mid-size, medium-size pieces of private equity or private credit or private real estate. And then we figured out that the buyers for the things that could be sold wanted to give us a huge discount to buy an existing private-equity stake, let's say, and they were really good investments. So, I looked at my team and I said, "We want to be buyers, not sellers. We want to start buying this stuff, not selling it." And it's how we learned about secondaries and started putting them in portfolios, both high-net-worth and institutional portfolios. And now it's a pretty...as you know, a lot of people understand secondaries and it's a good-sized market. But back then I knew nothing about it. And because of this college we learned about it and then we advised them not to sell the things that were sellable. And the things that weren't sellable we couldn't do anything about but that's how we helped them get a line of credit and fix their problem and restructure other things in the portfolio. So, there can be a lot of work that, and then there can be a lot of great ideas that come out of it. So...

Michael: So, what does ongoing servicing look? Right? In the wealth end, obviously, typically we meet with a client, at least our strongest clients, 2-3 times a year is pretty typical for most advisors. Is there an ongoing service calendar structure in the institutional realm for you as well?

Lori: Yeah. And so, there's actually...our team, and I'm going to credit Rick Van Kuren and people at LVW for this, not me, but they've come up with this governance calendar. And the governance calendar is quarterly, 4 quarters, and different things occur at different meetings. Some of the meetings are more educationally oriented, some of the meetings are more kind of standard meetings, it just depends. There may be one meeting where asset allocation and benchmarking is done.

And that's the other thing in the institutional space, when you talk about accountability, I think we've been honed by being in the space because a lot of colleges and universities especially, not so much others, but colleges and universities benchmark a lot against their peers in terms of endowment performance. So, we spend usually 1 meeting looking at whatever study comes out, or whatever it is, asset allocation relative to other similarly-sized institutions, so, that might be January and February, and then the next meeting might be reviewing. Spending, reviewing, investment policy, whatever. And then the next quarter might be...I don't know, could be some kind of stress testing or educational meeting or something around ESG. We let the client drive the governance calendar, we don't drive that, we just say, "What are the most important things to you?" They're always these standard things that we do. But, from a fiduciary standpoint, "What are the other things we should be doing?" So, there is this kind of governance calendar.

One thing I will tell you that's different post-COVID is that some of our clients are going back to more in-person meetings and others aren't. Others are maybe 2 meetings are in-person and 2 aren't. And that's being driven a lot by the people sitting around the room that are board members or investment committee members or finance committee members. And that's the other aspect of this that I didn't really mention. There's always a finance committee and an investment committee, they're not the same, typically, in our world. And we have to sit on both or we have to move across both of those and understand how they intersect. Because again, the investments don't live in a parallel universe to the finances of a college or a university or a non-for-profit. So, there may be a joint meeting with a finance committee or a board meeting. So, we let the organization help us define the governance calendar.

Michael: So, is there a sample of this that you can share with folks who are listening, just who want to see a version of what this looks like?

Lori: Absolutely. Yeah. We will definitely do that. But it's also helpful in family meetings to do this with big families, which we haven't talked at all about because most of our business now is more high-net-worth, ultra-high-net-worth. And it's not that the institutional business is small, it's just much smaller than it used to be in AUM. But it's still a very significant business. And the best practices around governance apply to multi-generational wealth and family offices. And so, I think it's probably useful, and I'm happy to share it.

Michael: Awesome, awesome. So, for those who are listening, this is Episode 345. So, just, if you go to kitces.com/345, we'll have links out to the LVW governance calendar, if you want to see what this looks in the institutional context, similar to what I know some firms now are doing with client service calendars in the individual-wealth context.

Lori: They're also different. I might be able to give you a couple other things that we do that might be helpful to people as well, just there's things that have been developed over time that have been helpful in communicating to multiple fiduciaries. So, there may be 2 or 3 things that I can send your way. And if you think it's helpful, you can share it.

Michael: Awesome, I appreciate that. So, again, Episode 345. So, if you go to kitces.com/345, we'll have some of the materials for what Lori's firm has figured out in the hard way of iterative development, as we go through. So, I guess there's 1 other question, Lori, in this domain. When you live this world of always having to come back to talking about benchmarks and talking about performance results, because that is part of the environment if you're working with an investment committee, what do you do when you hit the inevitable year where you're trailing? We said earlier sort of tongue-in-cheek, "Well, clients always judging you by what you've done lately isn't such a big deal if you're good at investing and getting good results." But even good investment strategies have years and cycles where they are not so in favor and may not show as well to a benchmark. So, how do you guys handle it when you get to those scenarios, those moments where you're not just staring down a client, you're staring down a whole investment committee that's drumming their fingers on their table and staring at you?

Lori: Well, I think 2 things. First, honesty, what's market-related and what is a mistake, and education are really key. So, we have an outliers report that we have developed in institutional meetings that we sometimes use in family meetings too, it depends on the sophistication level and what...too much information is just too much information sometimes. But it's important to look at the contribution of returns and understand what's market-related and what is...maybe this investment is out of favor and it's not a qualitative issue? And so, I think we have this outlier report where we talk about whether something has performed really well and it's outside of what we would've expected or poorly and how that has impacted returns. It's a little bit wonky but it's helpful to educate people.

And then sometimes you make a mistake and it can cost you relative to benchmarks. And you have to say, "Look..." And it's not like this happens overnight. Because we're constantly communicating with clients we may get to the point where we say, "Look, this particular investment is under review, we're a little bit concerned about this or whatever," but I think honesty and education and showing attribution and contribution to results is what helps. "Here's what's going on in the market. This year technology is on fire and value isn't, and we're value-tilted. And here's why, and here's why we're convicted in our position and how you're weighted," and that's what you have to do.

And the other thing that's been really helpful for me to learn and teach folks is the meeting does not occur at the meeting, it occurs before the meeting. So, figure out who has the power in the room, who are the people that other people listen to. We haven't talked about the other side of the business but we have a lot of professional investor clients that run hedge funds of various types, that are institutional real-estate investors, are credit people. And those people, it's good and it's bad, it makes you better at what you do but you have to be talking with them. And that can't occur during the meeting, especially if you're underneath the benchmark. So, I think it helps to have conversations, not just with the investment committee chair but with the people who really understand portfolios and can understand the contributors to performance, the detractors, and what you think about kind of the performance and what you think going forward and getting them to buy in. But again, it's always being honest. Sometimes you make a mistake and you have to say, "Look, this investment just didn't work out and it cost us X basis points," or whatever.

Michael: But that's an interesting point. So, the meeting doesn't occur at the meeting, it occurs before the meeting because, when you're talking with the committee, the reality is there are probably a few people who are going to drive the decision or the outcome that the others are going to look to. And so, if you've got their buy-in, the committee is likely going to come with you. And if you want their buy-in, you need to not wait until the meeting itself to have that conversation, you need to be meeting with them beforehand, you need to be sounding them out, you need to be getting them on the phone or the Zoom or a lunch or a coffee or whatever it is. And that's part of the dynamic of managing that committee environment is meeting with the committee members offline beforehand to know where they are and see if they've got buy-in to what you're going to be recommending so it's not a surprise at the meeting.

Lori: It's absolutely true. And also, new committee members, to that fiduciary fatigue thing, I think advisors lose institutional clients or any situation, it could be a family where the kids get involved, the kids are of age, and you've never talked to the kids before. That's where you lose clients. So, you have to be having those conversations beforehand. You cannot wait until the meeting occurs because it's too late.

Michael: So, out of curiosity, you were kind enough earlier to say you were willing to share the governance calendar. Is there an example of this outliers report that you can share as well, just to me, what you're describing? Right? We can all say, "Well, this was market and the thing was out of favor. And this was like, "Okay, maybe this was even outside of what we expected, maybe the thing's just really, really not doing well." But how to actually visualize that or put it into a report to clients I think is still a challenge for a lot of people. So, yeah. If you're willing to share that, we'd love to share that with listeners as well.

Lori: Absolutely. Yeah, I would be happy to.

How Lori Dealt With Being Sued By CitiGroup [56:42]

Michael: Awesome. Thank you. So, again, this is Episode 345. So, if you go to kitces.com/345, we'll have links out. So, Lori, help us understand the firm as it exists today. You talked about the institutional side but overall of however you measure asset-based or team-size, just help us understand the firm as it exists today.

Lori: So, I kind of referenced, when I left, Smith Barney, I joined an independent RIA because I felt that our sophisticated clients needed to be in a sophisticated platform. And at that time it was just organically-grown 5.5 plus billion dollars in assets, and a lot of that...it was 75% institutional. I made some mistakes, which I'm happy to talk about, because that's kind of an understatement to say they were mistakes. And then I was sued by my employer and, ultimately, won and they lost. But in that whole shake up we went from 5.5 billion dollars to...the other thing that people should know if they've never advised an institution is they will go to RFP. And I think our entire institutional client base went to RFP between being sued by Citigroup and some of the issues we had at the RIA we joined previous to my forming LVW. So, our history...

Michael: Going to RFP meaning basically they decided they were not confident in you and opened up just to other advisors to make pitches and a request for proposal?

Lori: Well, when you're sued by the largest bank in the world and you also have issues that they can sense where you've landed... that's the other thing that's really important to mention about institutions, there's usually an RFP process. And oftentimes there's an RFP process when you're still hired, and they're happy because they're just doing a fiduciary review.

Michael: They've got an obligation for due diligence.

Lori: Right. So, you have to like, "What high-net-worth client does that?" So, that's what makes the business so difficult because you're constantly having to show your value and you know that you're under review. And so, especially when decision makers change. So, in this case, because of some of my missteps and some of the things that happened in the Citigroup situation, I knew that this was going to be a problem. And so, our...

Michael: Because, from their end, if you're an investment committee, at the end of the day, look, Lori may be totally fine and completely in the right but, if you're the investment committee fiduciary, you just don't necessarily want to put your fiduciary liability on the line to hope that this whole lawsuit thing against Lori works out. You put it out to RFP, you accept someone that has a clean record, and you're not getting in trouble for that as a fiduciary, unfortunately from your end.

Lori: You know, in fairness, I think the Citigroup lawsuit was less of a distraction than joining the RIA we joined and then finding out that they didn't have the technology we needed. That was really hard. And so, institutions need rigor around the most basic things that I thought were so basic. My team had helped design the reporting systems, they were called Orion at Smith Barney. And so, we were so deep in that kind of stuff, reporting systems, we knew them all. And this firm just didn't have what we needed, and that we missed that. Basically, what they were offering us was something in beta test, so, there were live errors or a lot of things going on. And when I finally left that firm, when the lawsuit against me by Citigroup wasn't settled, that we won, it cost me a lot. Personally, financially, the combination of things. And I kind of sensed that a lot of our clients were going to go to RFP. So, it's kind of ironic or a little bit sad to think that a 5.5-billion-dollar business...it completely transferred over to this RIA. Completely. They just thought it was doing the right thing, they thought an independent fiduciary model made sense. And we ended up losing a lot of those clients and then restructuring the firm.

So, that's a long-winded way of saying, today, as we sit, we're about 2 billion dollars and we're probably the inverse, we're probably 75% high-net-worth, ultra-wealthy, and 25% institutional. And again, as a reference, more small and mid-size institutions, some of our legacy clients are still with us. But that's kind of how we're structured. And if you just separate out, the high-net-worth business has been a really terrific business but we did not have those kinds of clients before this all happened. And I think necessity is the mother of invention.

So, we have about...I think we have 24 people. We have 8 advisors, 4 people that are full-time management, a great COO with Fortune 500 background, 6 or 6.5 CSA operations people, 4 people in research and training, and 2 marketing and others. So, I think it's about 24 right now.

Michael: So, I'm fascinated by that shift. So, if I heard correctly, as you did the breakaway from Smith Barney big-firm environment where you build 5.5 billion dollars in mostly large institutions and went to the RIA channel, talking about benefits of transparency and fiduciary and all that in the RIA channel, the business all came with you to the RIA. The core problem was that, when the RIA turned out not quite to have the depth of platform that you thought you were getting when you went there, it was that lack of capabilities that spooked firms...or spooked the institutions, I guess, compounded with. And then the prior firm decided to come after you as well.

Lori: Right. So, I could give you the timeline. So, people probably gasp when they hear this. So, August 31st, 2008, I resigned from Smith Barney. And...

Michael: And was that...sorry, just to ask quickly. Was that because of the crazy stuff? You're in the middle of the financial...August 31st, Bear's gone down, Lehman's going to implode in about 6 weeks. Like, were you transitioning because, "Financial crisis craziness is happening and I want out of here," or was that just you were living your own timeline and that was just the coincidental timeline?

Lori: No, no, no. I was living in my own timeline. We had been working on it. Look, I was trying to make it work with Citigroup for a long time. And I felt that the business was changing, that it was going to be mostly independent someday. I get my timelines wrong a lot, and being early is the same as being wrong. And I also say pioneers, people call me a pioneer, usually, they're shot and killed. So, I just was early but I had been working on this exit...well, at the same time, I was just hoping that Citigroup would build what I really wanted to be spun out, myself and a group of other like-minded people who were doing really sophisticated investment advisory for institutional clients and high-net-worth clients. We wanted a separate, we wanted to be spun out.

And they created this kind of separate entity but they never really resourced it. And I just was like, "Okay, my kids are a little bit older, I can do this." And so, hired an investment banker, went out, looked at everybody, but it wasn't looking for a check, I was looking to go to a better place to serve my clients, grow the business, and be a part, be an equity owner and be a part of something bigger, ultimately.

And it just so happened...I have to go back in time and say to you that it's kind of like getting married and going down the aisle and wanting to run away. In those last moments, before I just signed on the dotted line, I had doubts. But I still did it, and that was probably a lot of deal fatigue, a lot of lawyering, a lot of whatever. And we left. I left, I resigned August 31st, 2008. My team followed the next day. I don't know exactly, I think we had like 12 people. And then almost immediately Citigroup put a TRO on me, a restraining order, and it was thrown out immediately. So, I thought, "Okay, I'm fine." I joined one of the larger RIAs in the country. The financial crisis hits in full force. And what did Warren Buffett say? The tide went out and you see who's swimming naked. The tide went out, I saw the financials of the firm, and I was, "Oh, man, I'm in trouble." And, because I knew that...

Michael: The tide went out and you saw the financials, not of the firms you left, the one you went to.

Lori: The one I went to, what the impact was. I knew what our business looked like, and that all our clients had come and we would be in good shape. But I couldn't control what was happening to them. At the same time, reporting over clients and realizing that technology doesn't work. And there were a lot of other things that occurred. But then, within a couple weeks, I have a lawsuit on my desk and I then realized...

Michael: From?

Lori: From Citigroup.

Michael: From Citigroup now. So, they hit you with the TRO, temporary restraining order. That was thrown out so you could keep going with the clients.

Lori: Yep.

Michael: And then they hit you with the full-on lawsuit. So, what was the lawsuit?

Lori: Oh, well, I think it's a matter...well, it is a matter of public record, so, I think, if you went on the FINRA website or whatever, you could find it. That's why I can talk about it. But I can't specifically go through all of the counts against me and my team because I can't recall all of them. But there are things like corporate rating, intellectual-property theft, a bunch of stuff like that.

Michael: Let me just... it's all the things that go with "Lori, you took clients and we're suing you for taking clients," that's basically what it came down to.

Lori: Yep. And I was told by...we had great lawyers in New York City who are really expensive and they said, "This is never going to go to arbitration, it'll settle. Don't..." I was like, "Settle? I didn't do anything wrong. I left all the files, everything. I didn't take a thing, I followed the broker protocol, all the legal things to the T. My team did the same, I don't understand this." I was just kind of fighting for the right, "I didn't do anything wrong." And they're like, "Well, this is how this works." I'm like, "Okay." So, "But they'll settle." And they never did and it went to arbitration.

And in the meantime, things at this RIA continued to get worse. And finally, we went to arbitration...and I think it all settled out within...and when I say "settled out," we won, so, let me be specific. I didn't settle but I had to pay my legal fees. And I think that was maybe...I want to be correct on this but I think it all took about 18 months plus. And then I exited the RIA. So, I negotiated an exit out of there and started LVW. And that was in 2011. So... But in that process of all of that transitioning and all of that angst we lost a lot of our institutional clients and had to rebuild the firm. And we did. So, it looks all beautiful in the media and the press, and I'm a very, very grateful person for everything, but that period was very difficult. Very difficult.

Michael: So, how much was still with you by the time LVW got launched on your own?

Lori: I think it was about a billion something, it can change. Maybe a billion, a billion and 2, I don't know exactly. It's too painful to even think about it. But it was unbelievable, and I just thought...I think there are 2 things that I would say to people. 1, when this lawsuit actually went through FINRA to arbitration...and I didn't know anything about arbitration, I'd never had a verbal complaint or written complaint, I didn't know anything about it. And you get prepped by your lawyers and they show you a bunch of things and there's notebooks and they say, "Well, they might ask you about this. They might ask you about that," like, try to prep you. But nothing prepares you for walking into an arbitration room and realizing that these people sitting around the room, who don't know really anything about you, are going to decide your professional future. Really, that was the bottom line in my case because what Citigroup was suing me for, which I will not disclose but you probably could figure it out, it just would've put me out of business. I would not...and so...

Michael: Right, just the way "you took our clients" shows up in actual legal terms, like intellectual-property theft for the client data and all that, just it's an ugly black mark, to put it mildly.

Lori: Ugly. I just thought I'm going to write, financially, in every way, this is game over. So, I went through the arbitration actually in the room. And I have to credit my team, they are just unbelievable people. To have followed me and have had to go through that was not a great experience. But it makes you stronger. And I just got out of that room and I thought, "Oh my god," and I literally got on my knees. And I said, "I know this is not what I had envisioned as my future," but I just prayed about it. And I can't characterize it any other way. And I feel like it was within a really short window of time, that was not supposed to happen, 1 of my team members called me and said, "Hey, I think we won this thing." I said, "What are you talking about?" And he said, "I just went on the FINRA website. We won." I'm like, "You're kidding me." I'm like, "I guess I'm supposed to still do this."

So, at this point, we hadn't lost any clients, the client loss occurred after that. So, once I formed LVW, it was RFP, RFP, RFP. In my gut, I had it, I knew it was going to happen and I would have to rebuild. And...

Michael: It sure sticks. So, I guess, sort of they trusted you through the 1st transition but they got spooked when there was a 2nd one?

Lori: Exactly right. Exactly right. And you know what, I would've done the same thing. So, you couldn't fault them for...it was really painful. It was a combination of circumstances. And what I would say to anybody is, if you put yourself out there and you want to grow and you really want to make a difference, there are going to be painful things that happen. And if you can move through them...I would say right now this business will last at least another 30 years. And without me, I am like useless overhead. I feel like my team has done so much. They do so much every day, there's so much more process in place. The business...talk about stress testing. This would be a very good lesson for anybody building an RIA, stress test your own business. You don't want to have concentration in your business, which we did.

And the other thing I would say to you, Michael, is, usually, maybe because I was a woman, I was 1 of the 1st, certainly in institutional advisory, I never got a piece of business from Smith Barney or the firm. These were all things that I organically got on my own with my team. So, it wasn't like I left Citigroup and I had all this split business and they were coming after me for that, I didn't. So, I was just in shock that I actually was sued. But then I had to deal with it. And it was my choice to leave and I had to deal with it and move through it. And I'm the 1 who did my due diligence on the firm I joined. So, I'm the 1 who did the due diligence on the RIA that I joined and I, obviously, made some mistakes.

So, I had to live with that and be accountable myself and re-engineer and think out of the box and figure out what I was really, really good at and what my team was good at and rebuild the firm. And with the help of my great long-time team members and also a gentleman who joined me from Wells Fargo, Joe Zappia and others, we've built a great firm, I think.

Michael: So, I'm struck by just some of the dynamics of this. As you framed it, they tried to hit you with the TRO, it got thrown out, they went after you with the lawsuit, even the lawyer said like, "There isn't going to be a great case here," you wanted an arbitration setting that has an industry tendency to favor the large firm incumbents. As I'm struck by it, it feels like, sadly, 1 of those scenarios where they weren't even coming after you for you, they were coming after you to make an example of other advisors who might also be thinking about breaking away with multi-billion-dollar teams and you ended up on the unfortunate receiving end of that. Because, well, as you said, you were the 1 who pioneered it, so, that means you're the 1 that gets shot at .

Lori: Who gets shot... Yeah. Yeah, no, I don't think it was about me at all. I think it was about just sending a message. I do. And I think there should be something done about that, but that's for another podcast. 

How Lori Regrouped After Her Lawsuit And Revamped LVW Advisors [1:17:08]

Michael: I'm struck by the irony now, hearing the timeline, it wasn't the breakaway that cost the client relationships, it wasn't even the lawsuit per se, that's not when the RFPs actually started happening, it was when the place that you landed turned out not to be the landing place and you had to do a 2nd switch. And the 2nd switch spooked...is, ultimately, it sounds like what spooked...

Lori: That's exactly what happened.

Michael: ...the institutions. So, I guess, in retrospect, what did you miss or what do you wish you did differently in the due-diligence phase to have made different decisions about platforms? Because it sounds like…this is like the infamous challenge for anyone breaking away, you have to figure out what platform to go to. Because everybody tells a pretty good story, and then you have to figure out which one's really going to be able to deliver what you need. So, like, what's the...

Lori: This is where I'm going to say something that some of your listeners may be eye-rolling at, but culture does matter and it's not amorphous. And I think the 1 main thing I missed and what my gut was telling me is we were very different in how we approached clients, solving their problems, and everything you and I talked about earlier about institutions and investing 1st. Investing, it was not the 1st thing they did, it was all about...and there's nothing wrong with planning, we do deep planning, planning is very key, but they had insurance routes, they were planners, they did not understand our business, they had hubris. And I missed it. And I don't know if I really missed it, I just ignored my gut. So, that was 1 thing, and I'll never do that again.

And then I did rely on some other people, not my team, but on some other people due diligence aspects of this deal. And I do think I also was outlawyered. And you get to a point where there is this deal fatigue and you just go, "Okay, we've been into the weeds and the minutia, and I've just got to take this leap of faith." And what I've learned from the whole experience when I've done a post-mortem on it, which I have several times, this is a quote from 1 of my closest friends in the industry, when I was beating myself up, when all these RFPs were taking place and all these institutional clients were leaving and I'm forming LVW and I'm like, "Oh my god, clients are leaving," he just looks at me and he said, "don't beat yourself up, you just weren't as smart as you thought you were." And I'm like, "Wow, you're right." But guess what? Now I'm smarter.

And so, I've been able to help business owners going through transactions, mergers, acquisitions, selling, identifying where they want to land after they sell their business, if they want to stay with the acquirer. I know more about restrictive covenants and non-competes than ever, I would never know this stuff if I hadn't had all these things happen. So, I'm not just saying this, from the bottom of my heart I am thankful for it all. And you can't go, "Yeah, if I only did this, this would've happened. That is just false thinking." And you also can't say...I don't know, I think you have to just look at it and say all of these things led you to where you are now and "Where I am now is a pretty good place." So...

Michael: So, as you did the transition to LVW and go out on your own, I guess, what did that due diligence look as you were coming off of the challenging prior firm? What led you to hang your own shingle instead of just saying, "Okay, I got this platform wrong, let me find another platform." You had made a decision to pursue a platform the 1st time but then hung your own shingle the 2nd time. Just help us understand a little more how you were approaching the transition when you had to do the 2nd one and what was different in your reasoning and your decision making.

Lori: I was pretty exhausted, as you might imagine, but I did a lot of due diligence. And back then, even in 2011, there wasn't this big industry around RIAs and there weren't tons of options.

Michael: Right, HighTower was barely getting going, Dynasty only just launched but was still a very small platform. There weren't a lot of options yet.

Lori: So, I did join on to...heard of Dynasty and I did a Focus deal. And the great thing about Focus was they just said, "We're never going to make an entrepreneur an employee and we're going to let you do your own thing." And I was able to structure what I considered to be a small transaction, cash-flow-wise, and do what I wanted to do and have their support to build out the platform. And I had learned so much from my previous experience at the RIA I was at, of what kind of not to do and what I needed to do, that I really had done due diligence, if this makes sense, through failure. Because I had to do postmortem on everything and understand what went wrong here. And I am, as I probably mentioned, the least technologically-oriented person. I probably said that at least once during this podcast. And I have really good people around me, and I've always learned that and what I would say to people is just know what you're really good at, what your passions are, and be really honest about that. And then put great people around you who do the other things better than you. And I think I've always been good at bringing together a team like that and mentoring people. So, I think that I had enough resources in my team to help build the right technology and platform and build the firm out the way I had a vision to, after all these mistakes and missteps.

Michael: So, why do a transaction with Focus at all? Just what were they doing for you in this transaction?

Lori: Yeah. Well, the biggest thing, and I haven't really executed on it and I can't tell you why, but the biggest reason for me was, when you're 5.5 billion dollars and you're 20-something-year-old and you start in the industry and you become...not my quote but others, a "superstar" and you do it organically with no referrals from the firm, no one paying attention to you, you're kind of competitive. And you're, "I want to get back to that and I want to be bigger than that."

And so, what Focus offered was the ability to do deals or grow inorganically. But what I learned, and it was a good decision, it was not a bad decision, because Focus helps with a lot of things that people don't see on the outside, from compliance to education to best practices, but what I did it for and what it ended up being were different things because we have not done any transactions really to speak of because we've passed on a lot of stuff because of the cultural thing. Because when you have a really good business and it's growing, which ours was, again, from a pretty diminished state, but we were able to grow it organically. We didn't want to do transactions that would take us off our mark. So, we've made a couple mistakes, and I haven't talked about subsequent mistakes, we all make them, they weren't life-threatening, but we did look at deals, we did unwind 1. And then, in the end, we said, "You know what, let's just get our house in order organically. Let's keep organically growing."

And now we're kind of in a place where we'd to do a transaction, maybe a smaller 1, a few hundred million, something like that, where, as you know, in the RIA space there's a big succession issue. And I feel like we built a firm that has a next-gen team that's fantastic. I haven't mentioned this to you but I will tell you that I have lived through some significant personal tragedy. And 3 years ago I lost my husband very suddenly and I was literally out of the business for a year. And it grew and it did really well. And it made me realize that everything that I always wanted professionally I had, I had grown this business and this team that could take it over. And I had to reward them differently. And so, Joe Zappia and Kim Pugliese, our CEO, did a beautiful job at re-engineering our compensation plans, putting in deferred compensation for people. We've done so much work to build this business that we're kind of ready to do. What I thought I was going to do with Focus I was just really premature.

Michael: So, can you help me understand a little more how you've changed compensation? Just I'm always fascinated by firms just retooling compensation, I feel everybody's in a live continuous evolution of figuring out their compensation structures. So, what did you do or shift?

Lori: Well, again, I'm kind of the strategist and I would say that Joe Zappia and Kim really did so much work on this, benchmarking-wise and looking at what other firms were doing. And then we did something really unusual...and I'm sure other people have done this, I'm not going to say it's an original idea, but I feel it was my idea where I was like, "I need to figure out a way to reward people who are not just advisors but operations CSA, people...anyone in the business who's doing an outstanding job, I want to put in a deferred compensation program. And I want it to be discretionary and I don't necessarily want to have to do it every year for the same people, it can be different people. But I want to do this because I feel really grateful that I'm still standing, this business is growing, and I haven't done anything for a year. I've been out of the business.

So, that was kind of the genesis of looking at everything. And then it was like we have these really great advisors and they're young...and we have an advisor, for example, senior advisor who I think is 41 and who's been with me since he was 19-years-old, as an intern, also went through this arbitration. There are people like that that deserve to be in the management company, deserve to have equity. So, let's be really transparent and define a pathway to become members of the management company and own equity and value it. Let's put in a deferred compensation program that can reward anyone, not just advisors but CSAs to administrative people, anyone can get a deferred compensation benefit. Let's align our compensation program to our long-standing belief that "no shirts, no skins" is the only way to build a team, which we always have had compensation where it wasn't "eat what you killed." That's where I came from, that's how I was wired, but that's not how you build a team.

So, we wanted to provide the proper incentives around growing AUM and new AUM from existing clients. But we also wanted to have year-to-year stability and base salaries, so, we didn't want our people that weren't in the management company or equity owners to suffer if the markets were down and the business was down. So, there had to be this kind of appropriate balance between all those things. And we wanted, in the end, their full compensation across the board to exceed any median industry benchmarks.

So, that's my kind of strategic part of my brain. And then all of the devils in all of the detail were done by Joe and Kim, to a large extent. They were amazing at doing this. So, there's a target-based compensation for advisors, there's a new AUM bonus, there's a firm incentive bonus, and then there's something we call the KEEPs program." And that was the key...let me see if I get this right, the key exemplary employee program, and that was the deferred cash retention program. And then there was this clear spelling out of this path to equity and what was required for that and what the valuation was of our equity, etc. So, that's what we did. And that was in 2022.

The Surprises And Low Points Lori Encountered On Her Journey [1:31:18]

Michael: So, what surprised you the most on this journey of building an advisory business?

Lori: What surprised me the most...how strong I actually am. How strong I actually am and how much courage it takes. But it also is the most fulfilling thing because I've always felt like I had this purpose and it's just been fulfilled. So, I think I never had a grand plan, Michael, I never said, "Oh, I'm going to be a top wirehouse producer, I'm going to be this, I'm going to be in the top rank," I've never had this plan at all. It was always kind of one step at a time, I'm a marathon runner. And it's how you think about a marathon, it's like you cut it into bite-sized pieces so you can handle it. I never had this grand plan that, "This is what I'm going to be," but it just kind of unfolded over time and I just grew in my competencies. And the more I went through, the more I learned. And so, I guess that's the surprise. And sometimes the learning is painful but, boy, in the end it's still rewarding, it's really rewarding.

Michael: Yeah, the quote that I had heard from Stephanie Bogan, she does practice management consulting, the other week was, "Pain is just the rapid absorption of learning."

Lori: That's right. That's a great quote.

Michael: That feels pretty appropriate.

Lori: It does, it does.

Michael: So, you've highlighted some of the challenges but I guess, looking back, what was the low point for you on this journey?

Lori: Well, the professional low point in my life was certainly what I described, that kind of...I don't know, you leave on a high point thinking you're going to go on to this great chapter of building this and being with this independent RIA and...all hell breaks loose, as an understatement. We have the greatest financial crisis in history a month later, you're sued by the largest bank in the world, and the firm that you join doesn't really have what you thought they had. And then you lose your entire business and you have to rebuild it. So, that's kind of a low point. But, yeah...

The Advice Lori Would Give Her Former Self And Younger, Newer Advisors [1:33:38]

Michael: Pretty good one. Yeah. So, what do you know now you wish you could go back and tell you from 15-20 years ago before you started these transitions?

Lori: Well, I think a few things. I've always been a positive person, I hope that comes across. Even with all this I've always been an optimist. But I didn't live in the moment enough. I have 2 boys, who are amazing young men, who have helped me immensely after the loss of their dad. And I think about them as boys and kids and trying to balance all the stuff that I had to balance, and I always had this kind of perpetually, even though I didn't have a grand plan that I'm going to be this, I always thought I had, like I had 5 years from now, "These are my goals," or whatever. And I didn't really live in the moment enough. So, I think I would tell myself to stop and kind of smell the roses a little bit more and enjoy the moment.

And I think the other thing, I would say, is that what I've learned talking to a lot of really successful people that are clients or friends or just people in life that I've met is that everybody suffers from imposter syndrome, and these feelings of inadequacy and self-doubt, and to recognize and acknowledge your achievements and take time to do that. Because we all suffer from that. And we haven't really talked about kind of the early journey of being a woman in finance and not having a finance background but we all feel alone in that way. And I think you get through it and you learn if you stay open to growing and learning. There's really nothing within reason you can't do or learn.

Michael: So, what advice would you give younger, newer advisors...I guess, in that context, maybe young women coming into the industry in particular who are trying to get going in their careers today and navigate this?

Lori: I think I would say what I said earlier about being really objective, if you can do that, about what your gifts and your passions are and really objective about that, and then focus on something, focus on a segment in this business or an area that you can be really good at. So, for example, we actually hired a woman, a young woman who is a senior advisor who came from San Diego, moved to upstate New York, she found us, she reached out to us, we weren't hiring another advisor, and my advice to her was she's very outgoing, she's very smart, she has every qualification in the industry, is really use what you're really good at. You are a woman entrepreneur, focus on women entrepreneurs. You can talk their talk, you know what it's like, you are the wife of a retired Navy SEAL and you have 4 kids. Go to where you can really be empathetic and understand people and what their challenges are and build a business around that. Because you can relate to them and you have the skill set and the qualification. So, find what you're passionate about, find that niche, and go for it.

And find a good mentor, because I didn't have...I had a great mentor in my father figure but I really had no mentors in this business. I did have people that I looked up to and I tried to figure out why they were successful but I think now it's changed a lot and there are people like me that are willing to help and mentor. So, find a good mentor. Or 1 or 2 or 3.

What Success Means To Lori [1:37:58]

Michael: So, as we wrap up, this is a podcast about success. And just one of the things I've long observed is the word "success" means very different things to different people. And so, you've had this wonderful journey of success, I guess, almost twice since you got to build it once and have a tough transition and build it a second time, so, you've done the successful growth path for the business, how do you define success for yourself at this point?

Lori: Well, I've said this before, and sometimes it shocks people, but, if I died today, I feel that I would've made a difference in the industry, I would've fulfilled a purpose. I don't want to die today but, if I did, I have a lot of peace around kind of what my journey has looked like and what I've given back to both the industry and communities and things that I care about and the people I care about, my children, my family, my friends. And I'm just really fortunate to have all those people around me. So, I think, in the end, success is purpose and peace more than anything else. And I hope to do a lot more. So...

Michael: I like that, success is purpose and peace.

Lori: Yeah, I think so.

Michael: Well, thank you, Lori, for joining us on the "Financial Advisor Success" Podcast.

Lori: Michael, it was really fun. I think what you're doing is wonderful. And thank you for having me.

Michael: Absolutely. Thank you.