Episode 10 - Michael Nathanson, CEO, The Colony Group

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Wealth Management v2.0: The AdviceTech Revolution, Episode 10

with Michael Nathanson, Chairman and CEO, The Colony Group

PODCAST TRANSCRIPT

Gavin Spitzner (President, Wealth Consulting Partners, LLC):

Welcome to "The Wealth Management v2.0: The AdviceTech Revolution" podcast, where we are focused on the business of the business, the business of advice. And, specifically, we study and celebrate firms that are leveraging the combination of technology and humanity to deliver better advice to more people, and better outcomes for more people through that combination. 

I'm joined today by Michael Nathanson, Chairman and CEO of The Colony Group, the $11 billion independent wealth management firm headquartered, I believe, in Boston, but with offices in key markets across the country. And we'll get into that. Michael is both the chief executive and a practitioner who can't resist staying involved to help clients with complex planning solutions. 

You could say he wrote the book on "Personal Financial Planning for Executives and Entrepreneurs." No, he literally did write the book. I’ve got it right here. In fact, he's a prolific author of thought leadership within the wealth management business, very dialed in to the intersection of technology and advice delivery. 

Reading a number of those things, Michael, there are so many things I want to dig in with you. So, without further ado, I'm thrilled to have you on, Michael. I'll start with you the way I start with everybody on this podcast, an origin story. And while I don't believe you were around at the very, very beginning of The Colony Group, you came on early when the firm was at -- I think -- $600 million. Now, you're over $11 billion and growing. So, take us back. Tell us about the firm's early days, when and how you hit the gas pedal and got to where you are now, and then we'll get into where you're heading. Michael, welcome, and please take it away.

Michael Nathanson (Chairman and CEO, The Colony Group):

Gavin, thank you so much for having me. Thank you for that very warm introduction. Very kind. It's great to be here. Yeah. Our origin story begins in 1986, in March of 1986 when a gentleman named Kirby Hamilton decided that he was looking for a company that would be able to do everything for him from a financial perspective but was also not sales-oriented but more advice-oriented and that would be fee-only. He felt that at the time, and this was 1986, he felt that that just didn't...There wasn't a lot of that out there, and hence the founding of The Colony Group. He had thought about using his name as part of the name for the company, and was with his wife at dinner and talking about what to name the company. The restaurant was called The Colony, and that's how we became The Colony Group.

In terms of my origin story relative to The Colony Group, I didn't join The Colony Group until 2004, so 16, sorry 18 years after its founding, I joined. I knew The Colony Group, though, before that because...I got to know The Colony Group because I was their outside lawyer. I'm a big firm lawyer by background, or I was a big firm lawyer by background. I worked at a company called...a law firm called Hale and Dorr, which is now WilmerHale today, a very large law firm. I was a tax partner and had a great gig going there. Loved doing what I did, specialized in income taxation, primarily did estate and gift tax as well, and worked with high net worth and ultra-high net worth clients, just in a different capacity. Got interested in the investment management space. They had invited me to come over. A lot of the people here are big baseball fans. I was a big baseball fan. Joined the fantasy baseball league. Got to just become friendly with people here. And they invited me to come over and do the unthinkable, to give up a very hard earned partnership. I had been striving for that partnership forever. I went to a great law school with lots of important people and I was really interested in that track. And ultimately, just decided that I wanted to give this a try. And I did. I was brought over to convert...You know, Gavin, I think of the evolution of organizations within our space, within the independent advisory space. I think of practices, which is what The Colony Group was in the '80s, collaborations where practices come together and start sharing resources and collaborating but they're not necessarily working together.

I would say that was more of the 1990s for The Colony Group. And I was brought on board to help now convert with the collaboration into a business and to begin to operate it more like a business. And you're right. We were at approximately $600 million under management. We were a smaller company, and we began to behave more business-like. And that worked really well for a while. We got interested in picking up the pace of our growth, and I remember, took 18 years to get to $600 million. By some standards, that's not all that fast. And I acknowledge that. And what we realized is that we had the ability to be better. We had the ability to make ourselves extraordinary. Our vision is to be the leading financial advisory company in the world for clients and employees who seek meaning and joy in their lives. How are we going to get to that vision? 

And ultimately, what we realized is that we needed to come together with other firms. We needed to go to other firms, see if we could get like-minded people who had big vision come together and do something extraordinary together that we couldn't do separately. Tried to do a few mergers. Didn't work out all that well for a number of reasons, including around capital, but also including credibility in terms of doing deals.

And ultimately, that's when we joined Focus Financial. That was 2011. At that point, we were about $1.2 billion under management. So, we had doubled, which was nice, about 40 people. And we joined Focus, and within nine months, we did our first merger. We did a total of 12 strategic transactions, 10 mergers, and 2 strategic hires we've done so far. And today, we sit at about $12 billion under management. That is regulatory assets under management. It's an approximation. I don't know the exact amount. I want to be careful about that, and we have 15 offices and a little over 250 people and have grown ourselves now from a business to the next stage of evolution, and that's enterprise. And to me, an enterprise is a business that has become sustainable for generations to come. It's a business that relies in its people but has also transcended its people.

Gavin: Fascinating. That's a great way to look at it. So, talk about...through the acquisitions. Let's talk about culture a little bit and how you've learned along the way. You talked about some early partnerships or acquisitions that didn't pan out so well. So, what did you learn from those and how has that informed your strategy and coalescing with people you've brought on into a common vision and a common mission?

Michael: In terms of...So, we did do one acquisition, I would call it, a tiny, tiny acquisition before Focus, long before Focus, and that didn't go all that well. And, you know, we did learn from that. What we learned is that we frankly needed to set our sight a little bit higher, and we need to think more about why we were doing transactions. So, let me just speak to that. Our philosophy has been...Since the day we joined Focus and started truly doing transactions, our philosophy has been we will not do a transaction unless it makes us better than before, and unless it makes our merger partner better than before. We don't use the term acquisition anymore. We use merger as long as we can legally call it a merger because we believe that that is the respectful way to do a transaction, and also because we believe that it represents how we think about a transaction. 

We do not think about The Colony Group acquiring another company and changing the way our merger partner operates and teaching them about The Colony way, but rather, every time we do a merger, we do it to become better than before. That's the term we use, better than before. And that's the standard that we adopt. If a transaction is just going to make us bigger, we're not interested. It's got to make us better. It's got to add something. Every transaction, and I'm not going to take you through 12 transactions, but every single transaction we've ever done has added something important to what we do, has made us better. We've learned from them.

Culturally, here's the secret to success. Everyone talks about, "Oh, what's your culture? It's not a cultural fit." Well, it's true. There can be transactions that are not a cultural fit. We happen to be a fee-only client-centric firm. I know that's a cliché. If a firm is a...It's really all about sales and, hey, let's maximize the amount of money we're making. And, that's not really going to be a cultural fit for us. But putting that aside, we have a singular company-wide culture. I would describe very simply as it's a superteams before a superstars culture, and it's a culture of consciousness, awareness around how we treat each other and how we show up every day. That being said, every firm that joins us has its own unique subculture, and we're not looking to destroy it. Rather, we acknowledge. Every office is, by definition, going to have its own culture. Every team is going to have its own culture, and anyone out there who's telling you that, "Well, this is our singular culture," that's a firm that's probably not at least a larger firm. It's not really being honest about its culture. We all are truly multicultural if we think about that. And our secret to success has been to accept. As long as subculture is consistent, then we embrace that subculture, we encourage it, we learn from it, and it makes us, I think, a stronger organization.

Gavin: I love that. Then I'd say the firms, the bigger national firms really have tried to have a singular culture. It tends to be not much of a culture. It tends to be very inwardly focused versus externally focused. I've mentioned you're a prolific writer. I love your different thought leadership writing. So, within this same context, you want to riff a little on stag hunts and Nash equilibria?

Michael: Oh, I love that. Did you read that article?

Gavin: Yes.

Michael: I love it. I love it. So, it's great. I'm glad someone did. So, it's an article that I wrote for "Financial Advisor" magazine, and actually, it has gotten some attention. And I really like it because I think it speaks well to our industry because it does use math and theory.

Gavin: Right.

Michael: Here's the thing. So, imagine Rousseau's stag hunt. So, stag is a deer. Rousseau had this philosophical problem. He imagined, suppose you had a group of hunters and they're all hunting for a stag, a large deer, and they're in the woods and they need to hunt for food, and they find a stag and they've got the stag cornered. Now, all they have to do is work together, and as long as they work together, they will successfully hunt the stag and they'll have enough food for a week for each of the hunters.

Gavin: Right.

Michael: Here's the problem. A group of hares comes by. And again, he used stag, hare, rabbits, bunch of hare combined. And each hunter now has a dilemma. They could successfully hunt the hares. It's easy to kill a hare. So, they could hunt the hares right there, and if they do that, they will have enough meat to feed their family for one day, or they can let the hares go and wait for the stag. The problem is, if any of the hunters goes for a hare, the stag is going to get scared off and is going to be gone, and no one is going to successfully hunt the stag. So, you have a decision, do I hunt the hare or do I hunt the stag? And again, if you're going to hunt the stag, you got to be reliant on everybody else. You got to hope that everyone is going to do the exact same thing, go for the team effort.

Well, it turns out that there's some math behind that. And if you've seen the movie "A Beautiful Mind," about Nash equilibria and the theory that John Nash won the Nobel Prize for, and what he ultimately realized was you could put math around this. And, in fact, it's a rational thing to do either, but really hunting for the hare is the guaranteed food and most will hunt for the hare. And that's the problem with our business generally. What you get is people who think about doing what's best for them, for their individual practice. And in our industry, if we can get everyone to hunt for stags and not for hares, we could accomplish so much more. And I think about that and I wrote extensively about that and I applied it to RIAs. When you think about RIAs and some of the decisions we make as independent advisors and thinking about what's best for ourselves versus what's best for the entire company, for example, around succession planning, it's fascinating when you start applying these Nash equilibria and, another...

So, if you think about that stag hunt, there's another term called a Pareto optimum, and the stag, in that case, is the Pareto optimum, which again, you are only going to achieve, again, if you work together. And there's one more mathematical or philosophical construct that I talk about in that article, and that's the theory of constraints. And the theory of constraints, which is not so much a mathematical concept but it is a business concept, and the theory of constraints is basically a form of the weakest link philosophy, that a chain is only so strong at its weakest link. 

Or you could think of a garden hose. If a garden hose has a knot in it, then the output is going to be always constrained by that knot. You can do whatever you want to the rest of the hose. Until you deal with that knot, you're not going to get maximum output. And I think about our businesses and think again about the people you have, what you're doing, the way you are approaching service technology. I think about all these things, and none of us are ever going to be stronger than as allowed by the theory of constraints. In other words, we have to all look at the constraints in our organizations. We have to address those constraints. Sometimes those constraints are us. If we don't address the constraints, we will never maximize the output of our organizations.

Gavin: Fantastic. There's no higher value that an advisor can provide than to help a client really understand their purpose and be purpose-driven, which I think of more than goal-driven. Goals can be so generic at high-level and they don't encompass all that really matters. And if you can be the one to help unlock and give permission to do these things and to use their wealth for these things in more personal ways, that to me is...once you're at that level connecting with somebody, if you underperformed at benchmark last quarter, that's not going to be the reason that they leave you. You're on a whole 'nother plane at that point.

Michael: And that's important too. I mean, just to be clear, I don't mean to minimize that. That's always going to be important and we know what we are. I'm going to put it in a different way for you, Gavin. I actually think this is about survival. You know, I've written about this as well. The firms that are not able to evolve with the times, that are not able to evolve with changing demands by consumers, what we call clients, those firms are doomed. They're going to become extinct. And, the example that I like to use is Nokia. And Nokia was the best cell phone manufacturer in the world. They had almost 50% of the cell phone market globally. I'm a big fan of "The Matrix" movies. Those super cool phones that Morpheus and Neo and Trinity had, those were all Nokia phones. And now Nokia is gone and they're gone because Google with their Android system and Apple with their iPhone system came in and gave consumers really what they wanted, and by the time Nokia figured that out, it was too late for them. 

There are already disruptors entering into our industry, and if we are not being proactive about evolving, if we are not able to go beyond what we've been doing for the last 30 years, we're not going to see a very favorable future. We need to evolve. And this, to me, is a form of evolution. Technology is not. Technology helps us. It helps our current state, and I think it's important. It's an advancement. I don't think of technology as an evolution, though.

Gavin: Yeah. Technology back to where we started. It's an enabler of an experience that you want to deliver, and it helps with process and engagement, but firms or advisors get excited about technology as a thing unto itself and a silver bullet. That's not the way, and to your point, it is survival because back to AI and tech and what's going on in the Fintech landscape, advisors that see their value in those narrower ways lower down that pyramid, they will be put out of business by those providers. You have to move up the pyramid. Let's go lightning round because we're running out of time but there's so many more things I want to ask, though. 

One quick thing you touched on earlier on around, you've got...being clearly very data-driven. It doesn't surprise me that you've got these gearing ratios. So, you talked about you've got specific numbers of clients or households that your client-facing advisors can adequately manage to deliver the experience and go deep. Can you share a little bit about that, what numbers you look at?

Michael: Yeah, sure. So, on that point, I think that once an advisor has 60 clients, that's probably as much as they can handle. Now, we have some advisors that work a little bit differently from others and will handle more than that, some less. It depends on the intensity of those relationships. It's a little bit different on the business management side than on the wealth management side, but that's what I'm talking about. So, whereas in a wirehouse you might have a broker with 300 clients, here most of our wealth management advisors, they may be looking at 60 or so clients, and that's a pretty good number. But sure, the metrics that we're looking at as we think about our own dashboarding, for example, when we look at our company, we think about client retention. And for us, again, anything that's 95% or under is not good. We should have 100% or maybe 99% client retention. We have thousands of clients and given our business model, which also includes doing taxes for many of...we do thousands of tax returns a year. Given our business model, there's no excuse. Our clients should all be staying with us. Sometimes clients die and there can be other things that happen, but we should have great retention. That's the first thing.

We look at net new asset growth. People talk about growth and they conveniently leave out the market forces. I look at net new asset growth. I want to know new clients, contributions from existing clients less terminations less withdrawals. So, that's a big metric for us as well. We look at revenue per client. We want to make sure that that's a healthy number for us. I look at average client AUM, certainly revenue, profitability. I look at headcount. That's very important for us as well. I'm going to intentionally put AUM last. I know everyone talks about AUM because it's so public, but, AUM is important assets under management, but frankly, it's overblown, it's deceptive. People rely on it, and they frankly shouldn't. There are firms that have probably the same $12 billion of AUM that we have that might have 25% of our revenue and 25% of our workforce. It doesn't really tell the whole story.

Gavin: Right. Yeah, especially for a business, the way you do it, that you've got other revenue streams, which we could get into a whole hour discussion about evolving pricing models and all of that.

Michael: Yeah.

Gavin: We touched on COVID slowing down the tour accounting, but obviously, doing other services around business management. But speaking of COVID and your points about face-to-face social capital, so how have you adapted? Any examples, especially in terms of business development? How do you build those relationships and grow new clients? What are your key metrics in a remote and virtual world?

Michael: Yeah. So, we launched something called Project Catalyst here this year, and we have some big ambition around business development and around specifically organic growth. This is a year that we've done a number of mergers. We decided to take this year off, just integrate. We decided that before COVID, and we have been upping our efforts in terms of organic growth, and part of that is rolling up Curated by Colony and utilizing that as a differentiator. Part of it has been training our people in terms of new ways of thinking about business development. We are users of CEG. You may have heard of them before. They are very much in favor of utilizing, for example, the discovery process, so changing the way we think about presenting ourselves to a client and speaking a lot less about ourselves and spending much of the first meeting just learning about the client and doing the whole commercial after that, maybe even at a separate meeting. And not everyone is doing that here. We have people who have been very successful using the old way of doing things, but for those that are open to it, we've been rolling this out and doing a whole training session around that.

We've been doing pipelines now. We have regular pipeline meetings for each of our service teams where we talk about opportunities to better service and do more for existing clients and also opportunities to go out and engage with new clients. And that's become a much more collaborative process. Gavin, you know what I would say, ultimately? What we're doing a lot more of is measuring, and putting that out in front of people, and being transparent. There's a great book called "The Great Game of Business" that I read last year and brought it out to our company. And what it talks about is that when you want to have a successful company, you need to think of your company as a fish tank and it's got to be completely transparent. Everyone sees what goes into the tank. Everyone sees what comes out of the tank. And increasingly, that's the way we operate The Colony Group as a fish tank so that everyone can see exactly what's going. Sharing these metrics, sharing specific goals, sharing specific results, I think makes a big difference.

Gavin: Love it. Let's talk about the future of the industry as we wrap up. There's been a great deal of needed focus, very needed focus on making the advice industry more inclusive both in terms of the clients we serve and the composition of our firms. Millions of those who need financial advice the most have historically not had easy or any access to it. Any perspectives you can share? And, I'm not specifically asking about The Colony Group, in particular, but just as a thought leader in the business, thoughts around those areas?

Michael: Yeah. So, you're referencing diversity, equity, and inclusion. And I will reference The Colony Group as well. That is something that we should all be thinking much more about. I go to conferences and I look around and probably have the same experience you do too, Gavin, at least when I used to go to conferences, given that it's COVID. You look around and it's quite predominantly a white and male collection of people there, and all trying to do good for the industry, but we suffer from not enough diversity in our industry. And there's some great information that the Center for Financial Planning has put out there on the actual demographics within our industry, and those are numbers, and those are undeniable. I think about The Colony Group and I look at those numbers and say, "Well, we compare favorably to those numbers," especially in terms of gender diversity. You know, we have I think done better than most others in terms of gender diversity at all levels of our company, including our C-suite, which I think is mostly women. And yet, as I think about that, I think that that, to some extent, is a deflection of other forms of inclusion and diversity.

And I will tell you that The Colony Group has engaged a consultant, and we are going to quite soon begin a new journey toward even more intentionality around diversity, equity, and inclusion. And what I mean by that is we have a vision to do more not just in terms of hiring, which is what people think about, but also just in terms of the way we interact internally and the way we interact externally. So, for example, we've recently added diversity to all of our third-party questionnaires. When we're vetting a vendor, a research provider, anyone, we want to understand how they're approaching diversity, equity, and inclusion. And, this year has been a wake-up call for companies, and those companies that choose to be defensive, or those companies that choose to make excuses such as, "Well, we don't get enough diverse candidates," those are the companies, the very companies that need to step up and become part of the solution. It starts with us, and the solution has to come from all of us. So, The Colony will be at the head of that. We will be a leader in this movement.

Gavin: I love that. It's all...You used the word intentionality. It just takes that mindset of being intentional and it unlocks all kinds of possibilities.

Michael: But you know what, though, Gavin? I actually didn't...That's not a term that I made up. That's a term that came from our becoming better educated speaking to a variety of consultants before we finally hired our diversity, equity, and inclusion consultant. And I was educated about that. I was educated about different ways to become intentional, and I think we all need to open our minds to some learning on this important topic.

Gavin: 100% percent. I'll wrap up with what I ask my guests generally. So, you're a pretty young guy. You've accomplished a tremendous amount, your whole law career, and then this. You probably could have retired by now, but obviously, I can tell by your passion and energy that's not in the foreseeable future. So, what keeps you going? What keeps you engaged? What gets you up in the morning, and also what keeps you up at night?

Michael: So, I look around at our industry and what I see are lots of firms doing good work for clients, but they all look pretty similar to me. And what keeps me going is the notion that it's possible for us to achieve something truly not ordinary. Let's call it extraordinary. What we often say here at The Colony Group is that we see ourselves as a ship sailing in a sea of the ordinary, a sea of sameness seeking the extraordinary. And, in fact, we use that kind of graphic as we chart out our goals on our intranet. And what keeps me going is the search for the extraordinary. 

What keeps me going is understanding that there is something bigger than all of us, that we have the ability to evolve into something truly different, truly special, truly extraordinary, and the way to do that is to bring people together, which is one of my favorite things to do. It's one of the great joys of my job as the CEO of The Colony Group. It's bringing people together that wouldn't otherwise come together, and only by bringing them together, enabling them to do their best work and their most meaningful work. What keeps me going is a search for extraordinary, a search for meaning, a search for joy.

Gavin: Well, that is inspiring. We will be watching that journey. We'll watch you as you keep searching for that and pushing that vision and that mission. Michael, thank you so much for the time. I really enjoyed it, and we'll talk again soon.

Michael: Gavin, thank you so much for having me.

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