Earlier this month, Schechter Investment Advisors, a Birmingham, Mich.-based registered investment advisor with $4 billion in assets under management, announced its sale to Arax Investment Partners, a wealth management platform backed by private equity firm RedBird Capital Partners.
Schechter has a long history in the industry. It’s a third-generation wealth advisory and financial services firm, founded by Robert Schechter in the 1970s, who was previously one of the top insurance salesmen at New York Life before creating the firm. Schechter’s life insurance business will remain a separate, independent entity.
Marc Schechter, who was CEO of the RIA and is now a managing director at Arax, recently spoke with WealthManagement.com about the decision to sell, why he was on the fence about the deal and his thoughts on private equity investment in the wealth management space.
The following has been edited for length and clarity.
WealthManagement.com: What was behind your decision to seek a buyer?
Marc Schechter: First, it was reacting to all the potential buyers that were coming to us. Once we hit $1 billion, I got a voicemail or an email every day, and I ignored it. I had no interest in hearing about it. And then some of my peers around the country started going through it, and I think they were more at a point where they were looking to sunset their career and looking at it more as an exit. And I had no interest.
On the growth side of building, I’m going to be growing until I’m no longer living. That’s just my personality. I’m just driven to keep building and enhancing and helping more clients. And, I think we’re a great home for advisors at Schechter, and I was starting to embark on a path of having other advisors join us.
It was just very time-consuming, working with the M&A side, and I found it taking time away from me spending with clients or some of our other advisors spending with clients. And a lot of this boiled down to the opportunity to identify a partner who can handle all of the, say, non-essential client communication and advising that needs to be done to run an RIA and allow us to spend more time with clients.
I found all of a sudden 60% of my time is spent running our business and 40% with clients. And I personally enjoy the client-facing experience more. I like working internally with our advisors, but I don’t like dealing with the guts of the operation and what’s needed to grow. We’re at $4 billion. We really had a vision of growing to $10 billion organically, maybe some inorganic, and I didn’t want to keep doing that with only spending 40% of my time with clients.
WM: Will Arax help with M&A and recruiting?
MS: They will, and they’re better skilled at that. They have a whole team of people to do that.
WM: What kind of acquirers did you consider during the process?
MS: We looked at people who were not in the investment space, those that are thinking about getting into the investment space and maybe having us run that. That was intriguing. We looked at people who are just financial, hands-off. They’ll give us capital to go out and acquire other groups.
And we spoke to other groups like Arax who have made it their mission to bring us together and share resources and capabilities to help us all grow. And this was the most attractive. It allowed us to get partners who know what they’re doing and can really bring added value and intellectual capital to us, and allow us to continue doing what we’re doing the way that we do it.
And I’m excited about the economic opportunity of the growth of Arax that I’m sharing in. I got paid some cash and some stock in Arax, so now I’ve got a smaller piece of a bigger company.
WM: You said that there were times during the negotiation process when you on the fence about the deal. Why were you on the fence?
MS: There’s an element of giving up control that every entrepreneur faces and potential fears that I ultimately got comfortable with as I got to know these folks over more time. It was a couple years of thinking, talking, questioning and then doing.
WM: The history of Schechter goes back several generations, back to the 1970s. How will you maintain that history? Will the Schechter name go away?
MS: We have an insurance advisory and estate planning operation, which deals with very sophisticated planning and very wealthy families. We’ve got five tax attorneys on staff. That business has actually become a B2B2C business, where hundreds of life insurance professionals around the country bring us in to help their more sophisticated clients. So that business is not part of the transaction with Arax. We have about 35 employees there and about 35 on the wealth side.
With Schechter Investment Advisors, I envision that we are all going to keep our own brands, but probably over time there will be a move toward a common brand with Arax. But it very well might never happen.
WM: How do you blend your investment philosophy with Arax? Is your investment philosophy going to change?
MS: There are groups out there acquiring that have their way and their method; you come into our world, and this is how you manage things. We wanted to not be limited on the investments that we can offer our clients. We’re independent for a reason, and we wanted to maintain that independence in terms of investment selection and also client service.
If we want to invest more in technology to benefit our clients, or provide a higher level of service or have a higher ratio of customer service associates to clients than most of the industry does, we didn’t want to be limited in that. We cater to high-net-worth and ultra high-net-worth clients, and they recognize that. And they realize that the entrepreneurs that they’re bringing on board have been successful for a reason, and they’re putting a lot of trust in each of us to continue doing what we’re doing.
WM: What stood out about Arax from the other firms and platforms that you considered? What are the specific infrastructure and resources that were really attractive to you?
MS: First, it was my comfort with them as people and feeling like we had shared philosophies and goals and beliefs. It felt like they care about the client first, and they’re not going to do things to hurt that client experience, which was the most important thing for all of us.
Second is, we’re pretty early in their process of acquiring groups. We were like the 10th group to join. And we have an opportunity to help them shape their offerings in a better way than if we were just going into a 200-advisor firm, like Focus or Hightower.
WM: I know that Arax is owned by a private equity firm, and there’s a lot of private equity money coming into the RIA space. What are your thoughts on private equity?
MS: I feel like private equity plays a different role in this industry than it does in a lot of other industries. In other industries, there is typically a tendency in the private equity world for consolidation to come alongside cost-cutting.
In our world, we need to keep our advisors happy, and our advisors are only going to be happy if their clients are happy. If their clients aren’t happy, the advisors aren’t happy, they’re going to leave. And Arax knows that it’s going to be true with anybody they acquire. And Redbird, who’s investing money in them, knows that. So in our world, I feel comfortable that it’s not a scenario where we sell and then the private equity world is dictating: we got to cut costs 10% or do this. The ratio of advisors and all their revenue is coming from this whole pyramid of advisors and then clients, as opposed to, ‘I got General Motors and Ford as my clients right now and I’m selling nuts and bolts to them and I’m going to be able to keep selling them to them.’ But there are only 10 people in the business development group of the manufacturing company that’s got 1,000 employees. Here, the business development folks are the key people that they have to retain.
I don’t have fears of smart private equity hurting the client experience. Maybe it might be different in a mass affluent world, where there are advisors who have huge numbers of accounts with assets between half a million and a million or something like that. But when it’s a customized service of investment advisory like we provide, they have to keep us happy or they’ll lose their business.
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