#ItzOnWealthTech Ep. 86: Behind the Scenes of the Cetera-Voya Deal, with Lori Hardwick

“Firms like Cetera, and certainly Genstar, at the private equity level, we see a lot of value there because we are already a well oiled engine inside Cetera. So we know that when we bring on this number of advisors and this number of assets, that we’re going to be able to help them run better, faster, and stronger.”

–Lori Hardwick, CEO of WealthTech, Red Rock Strategic Partners

That’s Lori Hardwick talking about Cetera’s announcement that they’re acquiring the independent financial planning channel of insurer, Voya Financial, and their 900 advisors. I spoke to Lori about what went on behind the scenes at Genstar Capital as they were evaluating Voya’s business, the reasons they thought it would be a good fit with Cetera, her thoughts on trends in the broker-dealer space, and more on this episode of the WealthTech Today podcast.

Before we begin, let me give a quick plug to our new partners, Xtiva Financial Systems. We’re launching a suite of consulting services with them to help financial services who are looking to upgrade their advisor comp and performance management systems but need to get their data architecture in order first. Please go to our website EzraGroupLLC.com and click on the link at the top of the homepage to read the press release, or click on the Enterprise Wealth page for more information about our performance management system consulting services.

Click here and schedule a free Discovery Session to find out how Ezra Group can help your fintech firm grow revenue in the wealth management space.

Companies Mentioned:

Topics Mentioned:

  • Lori’s Background and Career
  • Behind the Scenes of the Voya Acquisition
  • Insurance Company Trends
  • Enterprise Tools
  • Consolidation Begets Disruption

Complete Episode Transcript:

Craig: I’m happy to introduce my guest for this episode is Lori Hardwick, CEO of WealthTech for Red Rock Strategic Partners. Lori, hey, welcome to the program.

Lori: Thank you, Craig, excited to be here today.

Craig: I’m excited to have such an industry expert, the co-founder of Envestnet, someone got so much experience and so much in demand in the industry on the program. So glad to have you.

Lori: Aw, thanks so much, I’m excited to be here. I know we’ve got a lot to talk about, so much has changed in the last two years.

Craig: I have been introducing people and saying, boy it’s so boring out there, what’s going on with you? I don’t anything to talk about. Like it’s a tongue in cheek because there’s never a shortage of things to talk about. We scheduled this weeks ago, and it just is perfect timing, like, boom, we get to talk about Cetera buying Voya! Big news in the broker dealer space.

Lori: I know, we are so excited about this, it’s just a fantastic marriage. I’m very excited about this and for those who don’t know, I’m on the Cetera board. I joined the board last February, I believe, right before the world came crashing down. And we have had a number of things that have gone on within that organization, all very positive and under the direction of Adam Antoniades, the whole team has done an amazing job but this Voya acquisition, we really wanted this one. And I just can’t tell you how excited we are to have been the winner.

Craig: And the deal is for 900 independent financial professionals with $40 billion in assets go into Cetera, which they’re paying, according to the news reports, roughly $300 million, which is a number that keeps getting thrown around. An earlier deal, I think the Waddell and Reed deal is also $300 million, just a coincidence. Can you give us a little bit of an overview of what boards you’re on because you’ve pivoted your career a bit. We all know about Envestnet, everyone knows that, so just from from Envestnet until now just the quick overview.

Lori’s Background and Career

Lori: So I left Envestnet in 2016, was wooed away by Pershing to be COO at the parent company level there. Great opportunity and really just an extension of learning that never stopped from day one that I joined that firm. Then went to start my own company called AI Labs or Advisor Innovation Labs, I started that with Mike Zebrowski who had been CEO of eMoney for many, many years. And so we were building a FinTech firm, really designed for enterprises to bring in all of the best of breed technology in one spot. We sold that company, interestingly, on March 6, 2020.

Craig: Perfect timing.

Lori: We really timed that one well.

Craig: To Envestnet, right, you sold it to Envestnet.

Lori: And, and that’s where Mike continues to work. At that point, while I was at AI Labs I had been doing some work for private equity companies, when they were looking at new deals. And so, for example I helped Lightyear Capital with Serenity, in Chicago, which is now a $28 billion RIA, they’ve been on a tear. And then I was also helping Lightyear with new deals that they sometimes won and sometimes didn’t win, I was working as an advisor to Advent International, and other private equity companies.

Craig: And they’re huge, Advent is a gigantic PE firm.

Lori: Yeah, they are. They have a great team. I was really impressed, I have to say going into working with private equity folks I was feeling very vulnerable, not so sure I would be the perfect match for them. But I love it, I absolutely love working on private equity deals, helping whoever I’m working with at the time, helping those partners really find the value and they really appreciate the fact I’ve been in an operating role and understanding where the nuggets of value can be found or where the potential problems are.

Lori: So after we sold AI Labs, I decided I really wanted to work just with one private equity company. I didn’t want to keep getting calls, you know just willy nilly. And at that point, I had just recently engaged with Genstar, looking at the Brinker deal and Genstar Capital gave me a great offer to join them as a strategic advisor. And so I interviewed a couple other companies but I chose Genstar because their talent is amazing, they’re based out of San Francisco, it’s a younger team, and I just meshed with their style. Their style is very much in line with how I like to work, just being really open and upfront and transparent about, whatever it is, and we have had a great run. We put together, I think probably everyone knows at this point, but Orion and Brinker as part of that deal team. And then now I’m on the Orion board as well. I continue to be on Riskalyze’s board and I’m their Chairman, and then I’m also on Vestwell’s board, which is a retirement platform run by Aaron Schumm, a turnkey asset management platform, they’ve been doing phenomenally well as well.

Craig: Aaron’s awesome. I just had him on the program a couple weeks ago, it was great.

Lori: Oh you did, that’s right I forgot about that.

Craig: How could you forget about Aaron, Aaron’s amazing. So you’ve got a bunch of board involvement you got the PE involvement. Let’s wind it back, let’s talk about Cetera and Voya. So what made you guys target Voya for this acquisition?

Behind the Scenes of the Voya Acquisition

Lori: Well, Voya came to market, the head of investment bankers, it wasn’t out of the blue, targeting them. But we did decide as soon as we saw the deck that this was a great marriage for us to try to pursue. Of course Cetera has a long history of working with financial institutions, and so from that perspective, it was a great fit. Tom Halloran is President there and he had connections with myself as well as Adam and many others on the board. And, you know, of course during the course of this we all talked to Tom. I will say the team at Cetera did an amazing job, this all got spun up around Christmas time, they were working non stop through the holidays, really precious time that would have been spent with their families so I just give the team at both Cetera and Voya, kudos for really prioritizing this opportunity.

Lori: Even the night of the deal it went till 4:30 in the morning before it was signed. It was a critical deal for us, we were very excited to get it for a number of reasons, mostly because the cultural fit is perfect for us. We love the people, they seem to really like the group at Cetera, and I think that as we build on this, there’s a lot of new things that we’ll be able to bring to those Voya advisors. We have coaches, we have practice management, we’ve got embedded marketing in the platform. There’s a whole bunch of really cool new things to help those advisors continue to connect and better connect with their clients. I think we came out of the gate fast in 2021, and I think we’re gonna continue that ramping up.

Craig: So was there anything else besides the cultural fit when you saw the deck that Voya’s bankers were sending out what was it that sort of jumped out at you guys that made you say, we need we need to grab these guys, and then really fight for it. I’m sure there were other suitors that were in the bidding.

Lori: Yeah, there’s always other suitors, especially in this environment it is really hard to get good firms like Voya, it’s a very competitive environment right now. But they had had a lot of stability within their platform and their programs. A lot of the same home office folks had been there, and operations folks, as well as the advisors. They didn’t have a lot of attrition that was coming out of that firm. When we look at anything we’re looking for a stable environment which we can then fortify with new tools and solutions and services to help them grow. But we don’t like to see instability. And that really played well for Voya.

Craig: How do you see this as part of a trend of insurance companies, which 20 years ago, seemed to be swarming into the IBD space cross selling products, and now are sort of backing out? MetLife sold their business and IMG so theirs and now here’s Voya selling. What is that trend and what do you think is driving that?

Insurance Company Trends

Lori: You know it’s a great question Craig, I think that a lot of firms realize that they have assets as part of their total package within these insurance companies and banking companies and, you could add to that list BMO Harris sold their broker dealer as well. So I think that as they look at the multiples they can get for some of these divisions within their larger entity, it’s hard to say no, it’s easy to say what could we get for that asset and where are we today.

Lori: I also think that the changing risk metrics on these businesses definitely play into that discussion as to whether or not with the new change in political sides here I know that there’s a lot of expectation that there will be more potentially rigid rules, regulations that are put in place against our industry. And I think some of them are like, hey if we can get that money for it and we don’t have to take on more risk or worry about getting penalized for XYZ, who knows what it’ll be, will will dump the assets. So, you know, people firms like Cetera and certainly Genstar at that level, at the private equity level we see a lot of value there because we are already a well oiled engine inside Cetera so we know that when we bring on this number of advisors and these number of assets that we’re going to be able to help them run better, faster, stronger, and more efficiently, which one is the most important part.

Craig: All those things are important.

Lori: I mean, building them into the scale of the bigger engine, we have that on our side right now at Cetera. We’re a big engine and it’s well oiled.

Craig: And scale is really becoming the name of the game. If you look at all the competitors, the top broker dealers are getting bigger and bigger whether it’s LPL has 17,000 advisors, Advisor Group, I think is over 10,000 advisors. And now, Cetera is approaching 10,000 year at 9,000 now, and that there’s someone who said that’s a key threshold for going public. Do you think one of Cetera’s goals is to go public?

Lori: You know that’s not on our radar right now. I wouldn’t rule anything out, but that is not on our radar right now. Our radar is pretty clear as to what our directives are and how to continue to grow the business under Genstar’s umbrella.

Craig: There’s been a lot of PE firms moving in and acquiring broker dealers, or acquiring parts of broker dealers. What is it about the broker dealer business model that PE firms see as so attractive?

Lori: I think that you would see two sides of the coin here. In the private equity world there’s some that actually do not believe in the broker dealer world and the ability to continue to grow a BD because there’s a lot of metrics out there showing that RIAs are kind of the wave of the future and that that’s the way the puck is moving. I think that whenever someone’s looking at a broker dealer obviously they’re looking at scale, they’re looking at the stability of that firm of course, but they’re also looking for how to either stop the attrition out into RIA world or into other firms, or they’re looking for ways to grab market share outside of where they currently are. So you don’t buy a firm just to kind of keep it as is, it’s always it’s always to grow and to fortify with something else.

So, I think that a lot of the firms see broker dealers as these firms that haven’t had a lot of resources in the past or maybe they haven’t been able to put a lot more money into the infrastructure of the firm to make them run cleaner and faster. I know that the way that technology has changed everything like Jiffy.ai, for example, run by Babu Sivadasan, who is a longtime friend and we worked together at Envestnet for 15 years, he just started a few new firms like that that are doing business process automation at the home office level. And that is where I think these private equity firms as they think about getting into these large institution BD businesses, say how do we streamline it and make it faster and be able to continue to, obviously, thrill and delight the advisors and their clients, but also run faster on the back end and more efficiently.

And so scale, just can’t be scale anymore. It has to actually reduce your cost to serve eventually. So you can’t be touching every piece of data like we used to be able to. But now that these new technologies have come out it’s allowed you to build in a lot more efficiencies and be able to do work, not just faster but at a much lesser expense than it used to cost.

Invest In Others

Enterprise Tools

Craig: Indeed everything’s getting cheaper, whether it’s building software, deploying services in the cloud. A lot of the infrastructure is now becoming much more mobile. Of course, everything’s digitizing, so it’s easier to spin up more technology, when in the past you’d have to do very long deployments, touch every desktop, go to every office to deploy software with a disk or CD, and now it’s all online and managed centrally. The smaller firms are starting up faster because it’s easier to start an RIA since you don’t need to have all this on premise equipment, but it’s also easy when you’re scaling, a larger business that you can you can build out your infrastructure faster, cheaper and manage this and take advantage of scale so you have tools like Jiffy.ai are important and I had Babu on the program last year I think, his product is right is spot on in terms of what we need in the space now.

Lori: I totally agree. I am an advisor to them as well and they are, I think doing something that is necessary for not just broker dealers but like you said also RIAs. I mean the end clients are demanding this hyper personalization in a much faster way than we ever have been able to deliver it before. So the fact that there are tools that are coming out that allow us to do that and to be able to respond to end clients in a way that they expect to be responded to and to have different processes go through it, you know, really lightning speed. It allows us to be, I think, much more nimble as an industry, which is why I love working with that firm.

Craig: When I see any industry, especially in financial services, there’s a pendulum swing and there’s always a cycle of growth and then disruption. We saw this a while back before the last financial crisis or multiple crises ago where a lot of the firms that were household names got broken up or acquired. And now we’re seeing it again the top 25 broker dealers control over 70% of advisors. So you’re seeing a scale growing, and the consolidation really growing but while you think well that becomes a very powerful, that also creates opportunities for disruption that they get so big that they can’t move fast enough to handle new things, whether it’s new technologies or new business models or new assets like cryptocurrencies and things so where do you see disruption coming?

Consolidation Begets Disruption

Lori: This happens, this is the age old story of the wirehouses too and why they’ve been mired in legacy technology and not been able to move quite as fast as the independent BDs, and now we see it like you said, the independent BDs get bigger and bigger it kind of slows the ability to pivot and take on new things. But I will say, when you look at what firms used to want to hold proprietary and build on their own, that has changed a lot. Even the wirehouses and definitely at Cetera and all of their top end competitors on the broker dealer market are starting to outsource the data normalization outsourcing the data lake, figuring out ways to work in a much more nimble way and feed that data back and forth.

Lori: API’s obviously accelerated that notion a whole lot when they became available. What I do see is that the proprietary nature now seems to be more on how they render that data out to the end clients. I think so many firms had, you know, they were using Envestnet or using Morningstar and that’s one of two or three options, and that patience of having the same web interface with the client and/our advisor seems to be wearing thin. Those firms I know at at Cetera we have Adviceworks which is an amazing scalable front end for advisors to do the work and also for clients to see what they have with that advisor. And so there, you know, when I was at Envestnet we frequently talked about we want to be the hub, because as long as we’re the hub people have to keep coming back to us and it makes for such a sticky client, and it did. But now I think the firm’s are like, you know, with API’s we’re gonna modularize the pieces and components that we want from each platform and build our own experience with the end client. And that’s kind of the fun part too, I think developers like building that part more than they do the data lake and normalization and all that. I think it’s a pivot in the way that you know where these firms are spending their money rather than spending it on headcount they’re outsourcing them.

Craig: Which is good for consultants and if I can give a plug to my company where we just launched a new service with Xtiva Financial, which as we mentioned data normalization data lakes and data outsourcing, we’re seeing more firms having trouble with their data architectures and infrastructures and they can’t bring in new technology. I’m sure you saw this at Envestnet, they signed a contract then you go to install them and their data is a mess and the infrastructure is a mess, and they don’t understand how their architecture works and they’ve got too many silos. So we’re launching a data as an asset assessment service to help firms get their data architecture, data infrastructure in order. It links up with your either talk about outsourcing that and how firms are seeing that as not a value added anymore.

Lori: Yeah, I totally agree. I don’t think that they feel like they need to own that piece, and in fact I think a lot of them don’t want to own that piece, they know that it can be hard, it’s really hard to do. But you touched on something Craig that I find fascinating as far as a lot of the older firms with legacy are starting to buy new shiny firms that have a tool or a feature that is going to help them grow out of that legacy technology, we just thought this week with InvestCloud and Tegra118, and certainly Finantix as well, watching that come together, I’m a big fan of bringing old technology and new technology together. And typically the old technology folks have a lot of the clients that the new technology folks want to get, and also it kind of stutter steps anyone who any of the old technology clients that were thinking of leaving, frequently they will say, you know I’m gonna hold out and just see how this goes, because migrating off a platform is not easy.

I remember back in the Envestnet days in 2001, it was actually Envestnet’s very first acquisition was PMC, Portfolio Management Consultants out of Denver, and they had $5.5B of assets, we had $300M of assets at the time, and, you know that was probably the most pivotal move that Jud Bergman made and that team. I was worried because I’m like this is gonna change everything we’re not going to be a startup anymore. And yet, it gave us kind of the credibility we needed to work with bigger firms because we now had assets under management, and we were able to really bring up PMC and allow them the access to our new cool technology so they didn’t lose those clients. I have a soft spot in my heart every time I see kind of old technology meets new and I do think there’s a lot of value to that if you can execute against it right.

Craig: You mentioned that migrating to tech platforms isn’t easy and it’s something we work with a lot of firms on, and one of the things I like to say is inertia is a legacy tech’s friend.

Lori: Yes, for sure. Absolutely.

Craig: Because that keeps a lot of companies on their platform, even if they hate it because it’s just so difficult and so expensive to convert.

Lori: Yeah, I think also some people lose the sight of spending a whole lot this year could save us a whole lot more, and years to come, by making that change, and migrating to the newer technology option. They just can’t figure out a way to get out ahead of it and spend the money that they need to in order to really make the change for the greater good as for many many more years. So I do think that stands in the way but for sure just inertia. You know, when I went in lots of different times to sell to enterprises, a lot of times the leadership wanted to do it, they saw the benefit and they were excited about bringing on new technology but it’s typically the people behind the scenes, the operations and the developers and that who are like, uh-uh, do not get in my way. I do not want this new thing for whatever reason, it’s mostly protecting I think their own jobs, they are worried it would displace them. But in my experience, most of the leadership, and certainly those who are disciplined leadership, push through that. But it typically is the people behind the scenes that are saying, this won’t work because of XYZ.

Craig: No one likes change right most humans don’t like change, what’s the rule of thirds for change where, when you when you announce a change 1/3 of the people will be on board, 1/3 of the people will hate it, a then you have 1/3 in the middle, they’re like yeah, you know, whatever. So your goal is to get that other third that’s in the middle onto your side, because the other third is always gonna hate it because it disrupts their routine, or maybe they were involved in the purchase or development of the system that’s being replaced so they see it as a threat and they see that they won’t have a job. So, yeah, they don’t want to change because change is hard and it’s hard to pivot your career, those are also big issues. But I wanted to go back to something you mentioned, that you were helping with the evaluation of the Motif/Tegra118 deal, and then that’s been been supplanted by another deal. So what do you think of the Tegra/InvestCloud deal?

Lori: I touched on this a little earlier just the new technology and the old technology coming together. I think Tegra, you know, it sounds like they’re kind of going core back to the roots of the security APL and being the supermarket. I actually think that’s a great idea for for Tegra118 and I’m very good friends with Cheryl Nash. In fact, we’re meeting for digital happy hour tonight.

Craig: Digital happy hour.

Lori: Yeah, exactly. So, but she’s super talented, she has a talented team, I have no doubt they’ll do well. I do you think that marrying up with and InvestCloud who’s done really well lately, especially on the front end tools and kind of working through, you know, they’ve got data reporting everything kind of built in there. I think that that is, you know, depends how long it will take to get Tegra data and features and functionality kind of migrated into an InvestCloud option, but as soon as they do I have no doubt they’ll be massively successful. I really do think that’s what Tegra needed to kind of push them forward and accelerate that business.

Craig: If you look at the the gaps they seem to line up pretty well especially the strengths of InvestCloud in the client portal and digital wealth spaces.

Lori: Right. Yeah, we’re we’re having a similar view of kind of old meets new, and the Brinker Orion marriage that came together earlier this year and, bringing in that TAMP space, you know, Brinker is 32, years old, Orion is less than 10 years old so having those two companies and of course I have a bird’s eye view there being on the board. But that is another really exciting old needs new technology inertia that we’re seeing come together I’m really excited to see that one come together.

Craig: Two other great leaders getting together with Eric Clarke and Noreen Beaman.

Lori: Yeah, that’s right. Those two are awesome. Of all my boards that’s the one that I feel kind of like, it’s home cooking for me. It’s a lot of platform business and I feel very at home and they’re selling to the same clients that I sold to back in Envestnet forever ago so it’s nice because it’s a lot of meeting up with old friends in the industry, that’s for sure.

Craig: Well, Lori we’ve run out of time. I knew we would do this because we never stop talking, and there’s so much to talk about. So I really want to thank you for taking the time and it’s perfect time that we got to talk about these things. Where can people find more about you if they want to get you on their board, how do they reach out to you?

Lori: You know, the easiest way is probably the email me at Lori.Hardwick@redrocksp.com, but I will say, I will probably take on one more board assignment and then my dance card’s full for a little while.

Craig: Okay everyone, everyone out there all firms you’ve heard it there’s one slot left on Lori’s dance card if you want it, you better make a good offer to her, the bidding starts now.

Lori: Building that demand, come on.

Craig: You’re a fantastic marketer, self promotion, branding right, it’s all about that. Cool. Well thanks so much for being here.

Lori: Yeah, thanks for having me on. I always love talking to you and certainly I know you’ve got an awesome list of viewers and listeners and it’s always a pleasure. Thank you for having me.

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