Few would argue that the RIA space doesn't have a rosy future. But excessive inorganic growth through mergers and acquisitions might soon trigger problems for investors.
Some firms "could become behemoths and indifferent to the individualized needs of the clients," Gil Baumgarten, a 25-year wirehouse veteran who launched his own RIA in 2010, warns in an interview with ThinkAdvisor.
The CEO cautioned against behemoths — wirehouses — in his 2021 book, "Foolish: How Investors Get Worked Up and Worked Over by the System."
He runs Segment Wealth Management as "an advocacy business," he explains, building customized portfolios in-house based on clients' tax situation.
Baumgarten specializes in high-net-worth and ultra-high-net-worth clients, with a $10 million minimum. On Barron's list of the top 20 advisors in Texas, he, along with a recently hired junior advisor, manages assets of $1.7 billion.
In the interview, Baumgarten, who was a senior portfolio manager at UBS and Morgan Stanley, explains his method of constructing portfolios that clients "can live with through thick and thin," as he puts it.
Here are highlights of our conversation:
THINKADVISOR: After working as a wirehouse advisor for 25 years, at EF Hutton, Morgan Stanley Smith Barney and UBS, what prompted you to leave UBS to open your own firm?
GIL BAUMGARTEN: All the conflict I had with my employers over portfolio efficiency, and their not wanting it done that way.
I wrote a book, "Foolish: How Investors Get Worked Up and Worked Over by the System," about the travails of being a fiduciary inside a brokerage firm and all the conflicts of interest that come to light when you're trying to do the best for your client and the brokerages are trying to butter their bread.
Please explain.
The brokerages try to make money in so many different ways that they, kind of, box the client into bad spots.
They want clients to own mutual funds so the brokerage can get a 12b-1 kickback. They want the fund and [separately managed account] managers to whom they direct clients to pay for events and pay big fees to evaluate their [investment] performance and promote it to clients of the brokerage. There is a lot of back-scratching going on in this triad.
It goes on and on and on.
That creates a tough environment for clients to do really well.
So, on what principles do you operate your own shop?
We run it like an advocacy business. The client hires us to represent them, and we represent the client's interests.
I learned a long time ago that clients want this advocacy model.
What does the future hold for the RIA space?
The wind is at the back of the RIA [especially] with the availability of relatively inexpensive technology. The existence of legacy computer systems at the big brokerage firms puts them at a huge disadvantage.
It hasn't taken very long for the Schwabs and Fidelitys of the world to give the Goldmans and the Merrills of the world a run for their money.
The [clients'] money wants to come to RIAs.
Will the RIA channel be different five years from now?
I see aggregation and cooperation amongst RIA firms as the likely outcome but at the expense of personalization for the individual investor.
So much of my complaints about the wirehouse environment could also be applied to some of the RIA businesses, not from a conflict-of-interest standpoint but because they could become behemoths and indifferent to the individualized needs of clients.
What challenge must RIAs overcome to avoid that?
Develop enough critical mass to be able to provide a wide range of highly specialized services but do it without creating a behemoth.
To what do you attribute your success as an RIA?
Portfolio efficiency and the articulation of portfolio efficiency.
