As a pandemic-induced recession hits various sectors of the economy, for Jeffrey Concepcion's ever-growing financial advising network, market volatility is not so much a cause for concern as a promising catalyst for growth.
The founder and CEO of Beachwood's Stratos Wealth Holdings — a family of financial advisory firms that includes registered investment adviser Stratos Wealth Partners (ranked No. 16 in Barron's top RIA firms for 2019), Stratos Wealth Advisors, Stratos Wealth Management, Stratos Wealth Enterprises and Fundamentum, all of which collectively oversee about $14.5 billion in brokerage and advisory assets — has a goal of rolling up independent affiliates across the U.S. in a new city every month, with Stratos offering those firms and their advisers resources and back-office support.
Financial advisers tend to see an uptick in work during recessions. Clients naturally grow more anxious and needy amid a period of economic uncertainty, fretting over the future of their wealth. Those are the times when advisers really prove their worth, rather than the years of stable economic growth.
"This job was easy for a long time," Concepcion said, referring to the record economic expansion the U.S. had riding for the past decade. "It's not hard to look good in front of the client when the economy is good. But people who are just coasting by get called out in an environment like this."
Market chaos and the pressure that places on advisers could spur those near retirement in an already-graying industry — the average age of advisers is 55, with roughly a fifth 65 or older, according to J.D. Power — to queue up to exit the business.
That's where Concepcion's Stratos network is positioned to take advantage.
"So many advisers in the last six weeks have said, 'You know, I think I'm done,' " Concepcion said. "This volatility can be a catalyst because every day is a grind. Clients are concerned and (advisers) don't always have the answers. It's terribly stressful to talk to clients who are worried about money and stability. So this event dislodges people who were complacent, who were content with chugging along and who don't want to go through a downturn again."
That's not to say every adviser wants to stop working with their closely held clients when times get tough. But when clients need more attention, some advisers may prefer to focus squarely on them versus the other elements of running a firm — elements that a backing organization like Stratos can manage for them.
Of course, advisers who sell their book of business in partnership with Stratos and plan to keep working will get a better price than those who want to immediately cash out and retire, so there are perks to staying involved. Concepcion tends to prefer good people with sticky clients over the value of a book anyway.
This is why a recession could play into Stratos' business model with its focus on expansion. Even if some worried clients may want to pull some capital out of investments because of market chaos, the firm's advisory assets can continue to grow with the volume of independent advisers Stratos rolls up.
Adding wind to Stratos' sails is Emigrant Partners of New York. One of the wealth management industry's largest investors, Emigrant takes nonvoting minority equity stakes in traditional and alternative asset management firms. It's now invested in at least 15 firms representing $50 billion in aggregate AUA.
Emigrant struck a deal with Stratos in April for a minority stake. It's the first time Concepcion — who says he has reserved 35% of earnings every year since founding the first piece of Stratos in 2008 to either save or reinvest in the company — has ever taken on debt for the previously underleveraged Stratos network.
"Wealth management firms in general have been resistant to downturns. RIAs in general tend to get bigger during a great financial crisis," said Emigrant CEO Karl Heckenberg. "What we find is clients very much realize they need more than just investment management, but financial planning."
People are hesitant to change financial advisers in good times when everything is rosy. So a tumultuous period can present opportunities to onboard new clients in general, presenting a tailwind for good advisers with room for capacity.
Stratos has the added benefit of a business model engineered to roll up and support smaller firms, something Heckenberg sees picking up.
"A lot of advisers swore off going through a market environment like this after 2008. Well, nobody was expecting a 10-year historic bull market, so a lot of people put off selling or transitioning equity," Heckenberg said. "Now, some are realizing they don't have the infrastructure they need."
That infrastructure might be as simple as a system for meeting with clients digitally in a world of social distancing. Older advisers who want to ride into the sunset of their careers focusing purely on clients and not other pieces of the business are top prospects to sell or otherwise partner with firms like Stratos in this climate, which naturally translates to more size, more clients and more revenue. And that's without raising fee rates, which Concepcion says he has no intention of doing right now.
"I think there's a massive opportunity for all RIAs in this environment, but particularly for Stratos," Heckenberg said, adding that Emigrant itself has invested more in companies through the first five months of 2020 than it did in the last eight years combined.
The partnership will provide more than an investment of capital for Stratos' expansion plans, but also leads on firms to acquire. Concepcion said Stratos was already looking at 10 targets in April, and Emigrant queued up another four or five.
As of the end of April, Stratos reported at least 70 support staff in its Beachwood headquarters (though everyone is working remotely amid the pandemic), with about 800 total employees across all Stratos brands, including 300 advisers. It's been rolling up an average of about 25 affiliates a year and has a presence in more than 100 cities, covering about half the states in the U.S. The size of advisers it brings on range in asset size from $50 million to $1 billion. The overall company has posted a compound annual growth rate of 36% over the last eight years.
At its current growth rate, Stratos is on track to reach $20 billion in total AUA by the end of 2021.
Asked whether he could've just sold the company outright, Concepcion said he's not interested in getting out of the business. He added the capital from Emigrant will help Stratos become an even "better, stronger business on a stronger trajectory."
"I'm motivated by excellence and pushing myself and my peers to be the best we can be. Otherwise, if I had any brain whatsoever, I would've sold 100% of the company," Concepcion said. "But I love what I do."
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