In Profile

A Conversation With Mitchell H. Caplan

Advisor Authority

by P.E. Kelley

Mr. Kelley is managing editor for Advisor Magazine. Connect with him by email:

In it’s second annual study, Advisor Authority, Jefferson National sought to better understand the mindset of its distribution force, RIAs and fee-based advisors. What it discovered was so much more. In identifying certain types of investors, be it younger ‘return seekers’ or older ‘relationship seekers,’ it also found certain categories of advisors and, surprisingly, an intriguing interplay between which segment is seeking out the other.

We spoke with Mitch Caplan, CEO of Jefferson National, about the scope of this study, about an evolving advisory industry’s appreciation of its mission moving forward and about the emerging prospects for a changing advisory career.

AdvMag: What was the genesis of the Advisor Authority study this year, which seems to have crystallized a new perspective on both sides of the advisory equation: investors and the advisors trying to guide them?
MC: It was actually three years ago. We had a view internally that if we were getting this right as a franchise and as a business, it actually had very little to do with what we knew about insurance or even what we knew about tax deferral. It was more a function of how we were building a distribution platform for RIAs and fee-based advisors.

The idea was always if you build something from the ground up, you have to serve that distribution channel, and as you build products and solutions, they’ll have a unique bent to them, one that resonates with the advisor’s practice. This became the backdrop, and the construct, which became the way we built a strategy around Jeff Nat, and then really evolved, specifically, Monument Advisor as the platform, which is what we think of as a tax-deferred money management platform.

AdvMag: Were you actually thinking about what you might change about your perspective of how to approach investors, and, by extension, advisors?
MC: About three years ago we began dialoguing about whether we wanted to be subject matter experts or attempt to be subject matter experts in the space of RIAs and fee-based advisors. So we realized that one of the things that we need to do is step away from the day-to-day business and the platform of Monument Advisor and really try to do more research and get inside of the heads of advisors and understand what’s going on within their practices: how are things changing; what are some of the interesting characteristics of more successful advisors, the ones that are up and coming; what do we see happening with them? If nothing else, these could simply be be guideposts.

This was the real genesis of the Advisor Authority, which took us about ten months of work to get it done and out and fielded. That was the first one, which we completed just about a year ago, and then went right to work on doing the one for this year, which you saw just came out.

AdvMag: Where the first two substantively different?
MC: Yes and no. They were substantively the same when it came to the idea of trying to reach RIAs on the fee-only side and then fee-based advisors on the hybrid side. But what we did this time was say let’s add into the mix some direct-to-consumer perspective, particularly from the ultra high net worth. Let’s actually hear from the horse’s mouth of the end client… but not because that’s our business model. Ours is still singularly focused on RIAs and fee-based advisors, but we thought it would be helpful to hear what was really in the heads and minds and hearts of consumers, the clients themselves, in order to discern if there might be a disconnect between what an advisor might think and what the end client might actually think.

AdvMag: What were investors, the clients, saying about their advisors?
MC: It was interesting. It didn’t focus on ‘I like my advisor’ or ‘my advisor should be flushed down the toilet.’ Instead we tried to really focus on what you would consider to be high net worth, ultra high net worth, where there really were people who were focusing on aggregating wealth and building for retirement and a more secure future. It focused more on developing a more secure outcome so that a lot of the questions that were being asked around planning and analytics and investment strategy and all that stuff would be resonate and relevant. This is what we were really trying to go after

Again, we got a statistically relevant sample and the questions we were mostly asking them is, “What’s really important to you?” Less about, “Do you like or dislike your advisor” but more “How do you think about planning? How do you think about tactical management?” It was more about prioritize what you think are the things you’re going to need or that are the most important over the next number of years.

AdvMag: Can you give us a sampling of the types of information you tried to elicit?
MC: It focused on preference: Do you want to interact with your advisor in person, do you want interactive technology? If it’s technology, do you want it to be phone-based and mobile?

But we also tried to discover if there were any disconnects, where perhaps advisors might be thinking ‘this is the best way to reach my client and this is what I should be talking about’, because when you actually hear from the client it may be dead wrong. Quite often, in the end, it comes down to the way you address their needs, the buzz words that you use and the way in which you connect with those buzz words.

So, for example, does technology matter a lot to the end client? I think advisors are beginning to realize that you have to know these things. You see it in the adoption rates of those behaviors in the much more successful advisory practices where it’s less prevalent in the less successful practices.

AdvMag: What is the differentiator? Why do some get it and some do not? And is the principal distinction an age-demographic?
MC: Do younger clients have different behaviors than older clients? Yes… though not always. Sometimes they do and sometimes they don’t. It’s multi-dimensional, where it may get cut along two or three different lines.

AdvMag: What jumps out from Advisor Authority is that it appears that you’ve develop some ‘dials and knobs,’ if you will, where you can now segment different types of investors with different types of advisors… and then fine tune it.
MC: Yes! Perfect! That’s exactly what we are trying to do, thank you. We were looking for a way to have a dialogue with advisors, since those are our clients. And so we wanted to say to them “here are the things that you probably need to see,” behaviors that are consistent when you look across the industry at the most successful advisors out there. When you look at really successful advisory practices, here are the commonalities that you guys should know, here are the commonalities of what each of these kinds of investors, whether they’re a return seeker or a relationship seeker, are looking for, and the things that should matter to you in trying to engage with them.
One of the three or four really important take-aways for me last year was that if you were an advisor, there were three things that you needed to know and if you didn’t pick up on them you were doomed. First, you had to figure out how you solved for scale. Two, technology mattered and you need to figure out how to embrace technology and use it. And finally, you need to understand how it is you were going to dialogue and interact with your client.

AdvMag: How do advisors find scale in their practices today?
MC: Scale used to be achieved only through size. You had to be a billion or a two billion or a three billion or a ten billion or a fifteen billion dollar AUM advisory platform or shop. Ways to get there were organic growth or through M&E, and you’ve seen both happen.

One of the things I think we learned was there were firms which, by absolutely embracing technology and investing in technology, actually created implicit scale. They might only have 600 million in AUM, but they could run their business and their platform, their advisory practice, in a way that was very efficient; the margins could be as profitable as somebody who had three billion.

there were firms which, by absolutely embracing technology and investing in technology, actually created implicit scale. They might only have 600 million in AUM, but they could run their business and their platform, their advisory practice, in a way that was very efficient; the margins could be as profitable as somebody who had three billion

Now, it required an initial up-front in investment and watering and maintenance and care on the technology side, but that’s one of the good things about technology: if you embrace it and use it correctly, it allows you and gives you tools to get to scale at a different level and in a different way than you would otherwise be able to do.

AdvMag: Has JeffNat plans to strategically grow their producer agencies?
MC: Well yes, in number as well as how we connect with RIAs and fee-based advisors. Since 2010, we’ve grown from a couple hundred to more than four thousand, in both pure fee-only RIAs and fee-based hybrid broker-dealers.

For now, the relationship we have with them revolves around a single-point solution, where we have taken a god-awful annuity and elevated it. We couldn’t even begin to competitively compete… we just couldn’t have won. But necessity becomes the mother of invention. What we did have was a really good technology platform that allowed X and X-universe of people to reach us and be able to access low-cost, transparent and high choice solutions on a tech-deferred money management platform in the form of VIPs.

So, the goal was to elevate the dialogue. Remember, when we were doing this before I got here in ’08 and ’09, and even when I got here in ’10, when you were having this kind of a dialogue with an advisor, particularly on the fee-only side, their immediate reaction to the word “annuity” was, “No, don’t do it, not interested”, click.

You had to reframe the discussion away from a traditional annuity product with traditional bells and whistles and then really build it in the context of, “No, this is really about a tax-deferred money management platform where you’re utilizing an annuity chassis to provide those features”. We had to create a category, very much like we did with E-Trade and online trading or Telebank and online banking. That’s what we worked hard at doing.

AdvMag: Tell us about your new relationship with Nationwide. How do your existing methodologies play into this partnership?
MC: The acquisition is expected to close in 2017. One of the reasons we made the decision to sell the business this year was because we knew that we were at scale, we knew that, at 4,000 advisors, we were pretty engaged.

We knew that when you looked at the number of people who do business with RIAs and fee-based advisors, the way we were going to change the model was by being able to take the relationship we had and go deeper and add other things, and that’s precisely what we’re working on. It’s why we picked Nationwide, because their view jibed with ours. First of all, they had no real substantive strategy whatsoever in the RIA and fee-based advisor space and wanted it, believed in it desperately, believed in it as an avenue for choice. As we have continued to look with them, they are very open to having dialogues about all kinds of solutions that could be great for their members, meaning their clients, as well as anybody in the value chain, in the distribution.

When they have a dialogue with us, they’re willing to talk to us about providing more technology in infrastructure that helps RIAs and fee-based be better at their practices. We had to ask ourselves what are the other kinds of products that we could add in the world of insurance and outside of insurance around planning and risk analytics? All of these, really, at their core, are geared to RIAs and fee-based advisors and have a very strong value proposition, which is consistent with what we always had built at Jeff Nat, and that’s exactly what we’re working on now.

AdvMag: What will change, functionally, once the acquisition is completed?
MC: We’ll have a lot more capital and a much better rating.

They’re very open to the idea that you can take a core product, you can dis-intermediate it because you don’t believe in paying commission, because it’s a different distribution channel, and effectively change the unit economics and pass the value back in the chain to the advisor and the end client.

I think what you will see from us is the intersection of trying to really understand what RIA and fee-based advisors want in terms of tools and technology. Whether it’s about planning, whether it’s about risk analytics or other forms of insurance; whether it’s investment management. Whatever it is, we need to determine what they really want and try to make sure that we can provide it to them with a value proposition which remains as consistent and stalwart.

AdvMag: So, let’s return to the Advisor Authority. When an advisor told you “Annuity…No, thank you. Click” was that his bias or his interpretation of his client’s bias? Have you effectively leap-frogged the advisor, gone to the investor, found out a little more about what he or she wants and then reflected that back to the advisor? And has the reality changed? Will he listen to the story?
MC: Love it. First of all, the answer to your question is yes, unfortunately, in every respect. Sometimes it’s bias of the advisor, sometimes the advisor is long over it and sees the value of it and is trying to work through the bias of the client.

In the minds of advisors, I think there is a belief that what they always thought wasn’t possible or couldn’t be done, is no longer true. It can be done and the market’s evolving, and there is this construct of an investment-only VA which really fits their practice, and that we, Jeff Natt, have been at the forefront of building it from the ground up and don’t have any other conflict because it’s always been about building it for them, the advisor. Yeah, I think they’ll listen. You’re creating a new category and when you created online trading, it didn’t come with a negative connotation, it came with a blank slate. You had to design it as the alternative to more expensive trading through Merrill Lynch. Here, you use the word “annuity”, it has a very negative connotation and so you have to reframe it. You’re creating a whole new category.

AdvMag: Is the role of advisor, or even the career of advisor, being redefined?
MC: I think so. It has moved from being the stock-jockey, which was about picking stocks and bonds and you told your client what to get in and out of and that was it. Then you developed a model and asset allocation and you thought that your job as an advisor was being an asset allocator. That’s what you thought you actually got paid for, and the challenge in that is you have to outperform because if you’re not outperforming, then what are you getting paid for? The other challenge is the cost of actual asset allocation and money managements going to zero, because you have so many competitors out there.

So yes, for a bunch of strategic reasons, better and smarter and more evolving advisors recognize that there is this new role that they’re going to have to adopt, which is using technology and is at the intersection of planning and analytics and risk-based reviews and things like that as opposed to just being a portfolio allocator. You are now a tech-enabled wealth manager.

That’s what’s really happening. You’re seeing advisors slowly making the journey from being stock-jockeys to being investment managers to being wealth managers, and they’re going to have to look holistically after their clients’ entire balance sheet, assets and liabilities, and they’re going to have to do it in a very thoughtful way in which they bring value through things beyond just asset allocation, so risk control, structuring, taxes, all that stuff.

AdvMag: With the new administration coming in, and the market surging, what do you make of so much optimism within a climate of, well, such volatility?
MC: I’ll say this: Everybody hates a volatile market but they don’t hate a volatile market that basically has a strong upward bias. They only hate a volatile market that’s gut-wrenchingly moving down in some way. This isn’t really volatility.