The Deep Dive Podcast

Phil Hildebrandt, SBH CEO, is interviewed by Jay Hummel, co-founder of The Wealth Advisor Growth Network, on a wide range of topics including the M&A market for RIAs and thoughts on maintaining company culture while working remotely.

[Jay Hummel] Hi. It’s Jay Hummel. Welcome to “The Deep Dive” powered by Wealth Advisor Growth Network. It’s a big day on “The Deep Dive” for two reasons. One, we have a new sponsor, AIK2 Insurance Services. We’re happy to have them a part of what we’re doing on this show. And secondly, we have our first repeat guest. We’ve been doing this over a year. We haven’t had a request for a repeat guest until today. We’re dealing with a lot of things as it relates to how do you lead an organization? Not only for what we’ve dealt with the last 14 months, but the world that we’re dealing with. Financial markets, COVID, Delta variant. How do we think about culture? And we’re so lucky to have the CEO of Segall Bryant & Hamill, Phil Hildebrandt. Phil, welcome back to the show. I’m so glad you came back.

[Phil Hildebrandt] Hey, Jay, I’m honored to be the first ever duplicate guest.

[Hummel] That’s right, so make it a good one or you’re not getting invited back.

[Hildebrandt] That’s right. I’ll do my best, my friend. A lot’s changed.

[Hummel] Yeah, a lot has changed. So first of all, congratulations. We don’t need to hit a ton of it on the show but since you were on, you guys did a great transaction with CI Financial out of Canada. And I thought it was a great transaction, not only for them, but for you, so congratulations on that.

[Hildebrandt] Thank you, we appreciate that.

[Hummel] So we’re obviously going to, our goal today, as you and I talked, we’ll really kind of hit two things. One is just kind of the M&A market. How do RIAs and asset managers think about selling and scale? Last time you were on we talked a lot about professional management. You felt like that was the pivot that Segall Bryant made that changed the trajectory of your company. And so how should we think about today’s market where RIAs and asset managers are thinking about selling, not selling? How should they think about scale?

[Hildebrandt] Yeah, I think that the M&A environment we’re in right now is driven, in many respects, by that exact concept you talked about. Firms have grown, big RIAs used to be a billion dollars and now today, CI bought another one today, a $5 billion firm in California. So those firms have grown. And the thing is, it’s really a step function investment. from there to get to where we are, which is $26 billion. I mean, it takes a tremendous amount of infrastructure to be able to support that kind of growth. Well, that investment is pretty large, right? So when you get to be, say $5 billion, you’re faced with the question of, do we invest in that or potentially what’s going on now? Rather than making that investment with this consolidation, you’re selling into it. Letting somebody else make that investment for you. And just really focusing on the things that got you to five billion, which is client service, planning, investments, that type of thing. It’s just an easier path. And I think you’re seeing the consolidation in this industry, because it was one of the most fragmented that there was. You know, it was a bunch of small firms and all very geographically centric. And even what CI is doing is investing in great firms, in various different geographies to create a network across the country. And I don’t think that’s stopping anytime soon, not just with CI, but I think in the industry.

[Hummel] Yeah, I know. I agree. And how do you think about scale and size? So you guys obviously were of a scale, right? You decided to do a transaction because you believed, I’m putting words in your mouth, I would believe, you wanted to even be bigger, right? So if I’m a $2 billion, $5 billion, $7 billion asset manager or RIA, how would you think about it? The choice of investing in professional management, like you guys did, I’m going to mess up the year, it was probably 2004 when you did it.

[Hildebrandt] Six. 2006.

[Hummel] In (2006). So how would you advise those owners to think through those two choices?

[Hildebrandt] Well, I think, in some respects, scale can be overblown, because even at $26 billion, scale is a BlackRock or the types of really large, I think one of the best parts about our industry is there’s still a place for a lot of really great boutique firms. So I still consider us a large boutique and I think that’s really keeping that DNA. Regardless of whether you’re $2 billion, $5 billion, $26 billion. I think keeping that DNA of having that boutique mentality, I think is really important. I think what scale does allow us to do is make bigger potential clients feel comfortable investing with us, because if you’re $2 billion and somebody has $100 million, they’re not going to, necessarily, want to be your largest client, right? But for where we are today and then just the ability to invest in keeping up with technology. I think the technology spend in our business is where scale really matters, because I’ve seen, I think that the cost of data, the cost of technology in our business has probably been the single biggest change over the last five years. Just the cost of it going up. And so, having scale, trying to keep that price down has been an advantage.

[Hummel] Yeah. And if you’re, I’ll pivot a little bit, if you’re there, obviously, you’re CEO or owner of a firm, that decided to do a transaction, you and your partners, for all the right reasons. If you’re sitting there today advising, there’s so many CEOs that watch this show, how should they think through? Okay, they’ve now made the decision that they can’t go it alone anymore, right? They need to go either partner, they need to go merge, they need to go sell into something. How do they get clear about what they’re looking for on the other side? What they’re looking for in a partner or an acquisition partner? In the way you think about it sitting in the CEO seat?

[Hildebrandt] Yeah. I think part of it is the demographics of the firm. So if you’ve got, like, if you have aging partners that founded this business 20 years ago and they’re late in their careers, it depends on whether they’ve built a strong second tier. That’s kind of a key to that, because those guys are not going to be able to, or want to work indefinitely. So selling and facilitating a sale or to move that generation more into a leadership position is really important. One of the questions we got asked when we announced the deal with CI is why wouldn’t you buy it yourself? Why wouldn’t your employees buy it? Well, the short answer is because it’s too valuable. To be able to finance a business like this, you really have to use more debt than you’d ever want to do in a business of this nature. So even if you could raise, material amount of equity from your employees that still wouldn’t come anywhere close to the value that somebody like a CI would pay, or just somebody who’s interested in getting into that geography or getting into that business. So it’s really difficult. So for us, we had to make that decision candidly, back in 2014, when we originally took in a private equity owner in Thoma Bravo. And so that decision, this was really a second-tier decision for us. But back then the idea of having somebody who could help us grow and not financially grow, but really, they gave us a level of experience and expertise that we wouldn’t have had on our own. And so, they’ve done so many deals, that the value of the information of a Carl Thoma was absolutely foundational in us going from $9 billion to $20 billion. And then when CI came in, now we’ve gone from $20 billion to $26 billion. And so it really is building that foundation in a way that it’s so sound that it can keep up with the growth.

[Hummel] Well, you and I talked five years ago, when we were working on our book, “Success and Succession,” It frustrated the hell out of me and I always thought you guys had such a reasonable view. There’s so many founders, who were in the last inning, who look at the successor generation and say, “I can’t believe, you won’t take the risk to buy the firm.” Well, they just can’t, right? You can’t lever up. You’re not going to lever your house, as a 45-year-old partner, to go buy in. It doesn’t mean you’re not loyal. It just means you’re actually, frankly, a good financial person, who isn’t going to go make that decision.

[Hildebrandt] You wouldn’t want that person to be your portfolio manager, having that sword above their head, right? That would cause them to necessarily make decisions that weren’t sound, because of that pressure. So, I mean, I think employee ownership is important and we’ve had it for 26 years. You know, that aspect of it, I think there’s ways to do it. But then at some point the people that have built that business, they want to be liquid, too. So they can either try and sell it in pieces to their employees or do a transaction with somebody like CI. For us, the decision with CI kind of a simple one because what I didn’t want to do was have a partner that was a bank, an insurance company, or another PE. So, for us, it was kind of like, “Let’s find an independent, that understands both sides of our business.” Which CI was able to do. Because, as you know, we are both wealth management and asset management. And so they were able to do that in a way to support both sides of our business.

[Hummel] Yeah. That makes sense. And last time you were on the show, I thought it was a really interesting thing. You forced me. I never re-watch these. As the only repeat guest you actually forced me to have to go watch one of the shows and I hate watching myself. It’s like, “Man, we need a better host of this thing.” One of the things you said is. “We, as a firm, “always got better coming out of crisis.”

[Hildebrandt] Yeah.

[Hummel] And you look when you were on, you and I were in a November, COVID was a crisis. Certainly we had been at it for a long time, but now we can really say it was a crisis for our country, our economy, all this stuff. Talk to the group a little bit about how you led the organization through, and then I want to follow up and talk about the future.

[Hildebrandt] Yeah. I mean, you think about in the tenure of our firm, we had 1999, 2000, the tech boom and bust. We had 2008, the financial crisis and then we had COVID. So each one of those, I think, being an active manager, those are the times when as disrupting as they can be socially, from an investment perspective, that’s when opportunity gets created, because the volatility, the disruption, the dislocation, the mis-valuations that come from that sort of uncertainty is what leads good active managers to be able to excel. When you have a period, like the time between 2008 and 2020, when you have a QE environment where artificially low rates are compressing volatility, as an active manager, we were getting dominated by passive investing. That’s when passive investing came into its real stride. And so in some respects, we needed a pandemic like that to go back and show people that we could really add value as an active manager. And we did. And I think that’s why we’ve seen the growth surge coming out of it. Because once again, we’ve told people, you know, downside protection is under appreciated, but down 50 and up 50 is still down 25. And so, the less you go down, the easier it is to get back to flat.

[Hummel] Well, as you and I have said before, you always know, and I feel like we’re there again. You always feel like you’re at the top of the market when passive wins and people were trading GameStop on Robinhood and doing things, “Well, anybody can do this. This is easy guys.”

[Hildebrandt] We’re still there right now, Jay.

[Hummel] Yeah.

[Hildebrandt] But going back to your point about financing a business and the ownership question. Think about if you were a firm that was levered in March of last year, when you’d just seen the stock market drop 30% overnight effectively, right? And that debt didn’t change. The decisions that would force you to make, are not sound, long-term decisions. You’d probably be cutting people or cutting costs or whatever. And I think because of our ownership structure and the strength of our firm, we just rode that out and knowing full well that the opportunity presented by the disruption would be positive for us, if we could just hold through that. And I think our clients now, we get very little questions in those periods, because our clients have been with us a long time. They understand that metric and so they’re pretty calm, when you go through that, which is terrific.

[Hummel] Well, and they’ve been with you for a full cycle, now and the cycles keep getting–

[Hildebrandt] Absolutely. The new ones were probably a little more concerned, but the ones that have been with us a long time.

[Hummel] Yeah. The, the ones who have been with you and the cycles keep getting shorter, right? So you guys have been at it a long time, you’ve stayed true to your investment philosophy. The windows are getting tighter. People feel like they’ve been with you, the ones who have been with you, which is a lot of them, are going to stay with you because–

[Hildebrandt] Well, you know, the thing that I think makes us a bit unique is that we’re very investment centric. In a world that’s become very planning centric. And so, I think our discipline, our investment discipline, we just never varied from that through any sort of markets. And that has really put us in a good position today.

[Hummel] So now let’s kind of think about the future. You and I were kind of bantering back and forth. Last time you were on the show. I mentioned it. I say it till I’m blue in the face. Our industry is so interesting because our assets ride elevators. They’re our clients and our people. It’s computers, it’s, you’re in your guys’ Denver office today. Great. Right. You put some art on the wall, you know, you buy some desks, but at the end of the day, like our business is people, and how do you think about, and especially in the future, I get this question all the time. How do you create culture through remote work? How do you deal with sitting in the CEO spot? Should I mandate vaccines? Should I not mandate vaccines? How do you think about that as a leader of your organization? All the things that are coming at you today, to make sure you’re doing the right thing for the business, but also the right thing for your people?

[Hildebrandt] Yeah. It’s an interesting question, but the way you described it really lays the tracks for the answer, which is that our physical plant means nothing, really. Our people are the intellectual firepower, we have. It doesn’t really matter where they’re working, right? And so with the Zoom world, we’ve excelled through this period. I mean, nobody would have believed it. Going in that March 15th last year, when I made the call, that we were going to go home for two weeks. I didn’t believe it would work. I figured we’d have to hang on for two weeks and then here we are, 18 months later.

[Hummel] One, you figured it’d be a disaster. Two you figured it would only be two weeks.

[Hildebrandt] Two weeks.

[Hummel] Yeah, 0 for two. 0 for two.

[Hildebrandt] I mean I would literally, coming into the office is like walking into a time capsule. It’s strange. But I think that one of the things we talked about last time was, I made a comment. It’s very important to me. I said, as a CEO, it was very important that people understood that my decision-making was purely business. It was never personal. We talked about that a lot.

[Hummel] Yeah, we did.

[Hildebrandt] And that was really important because I always wanted people to understand that any decision I made was purely business-related. My family is my family. My business family is my business. And that was very important to me. Well, what happened is, during this remote work environment, that got turned completely on its head. So, it became the exact opposite. We had to focus on the personal and the importance of, I think, putting the mental and physical health of our employees first, actually improved our culture. And throw in there a George Floyd. In the middle of that, we had racial tension as a result of something that was not investment related.

[Hummel] Yeah, and you, I hate to bring it up, but it’s important. You had an intern, right–

[Hildebrandt] It was a tragedy.

[Hummel] Get accidentally shot and killed as a result of what was going on in downtown Chicago. So you guys have dealt with a lot.

[Hildebrandt] We’ve been through a lot.

[Hummel] Yeah.

[Hildebrandt] I do think that, I think that the trust that was created from our employees, because we were so intentional about putting the people’s health and safety first. Our people’s health and safety first. I think people really appreciate that. And I think that the other thing is, I think even myself got humanized in some respects, because people would see me in my home office with a T-shirt on, with a backwards baseball cap and realize that I’m just a knucklehead like everybody else. And I just had a job to do, but they didn’t see me showing up in a suit. Getting off an airplane in a hurry. And so they got to see a different side. And we did a lot of those types of calls during that period of time, just to keep people informed. And we didn’t change our direction. We always telegraphed where we were headed and I think people really appreciate it.

[Hummel] Well, and I laughed with somebody the other day, we were down in Hilton Head when our oldest who’s nine, now was like two, we were at an ice cream place. He starts spilling ice cream all over himself. I’m really mad. I’m agitated. I can’t handle it. I didn’t realize there was an older couple in front of us. And afterwards, the guy walks out of the car to throw his ice cream away. He looks at me and he goes, “You’re going to be a much better dad if you quit taking yourself so seriously.”

[Hildebrandt] Wow!

[Hummel] And, you know, I thought, that’s an interesting learning, as it relates to COVID, right? I think we’ve, hopefully we’ve, all gained some perspective. Thought about people more. Thought about–

[Hildebrandt] 100%.

[Hummel] what’s important versus not important as it relates to business, personal. But, I do, I’m anxious to ask you this question and again, our viewers know, we don’t prep for these. These are zingers.

[Hildebrandt] Yeah, absolutely.

[Hummel] I’m kind of old school on it. And I think a lot about it, is I’m a huge believer in cultures designed eventually by being around people. And so how do you lead an organization as large as you do? You know, we can live on Zoom for a long time, I think. But eventually, I just, maybe I just don’t know how you eventually, it’s the going out for an event in Chicago to go to a Cubs game and get your employees out and get them to see each other in person. It’s different things with our clients. How are you thinking about culture as it relates to us… you and I haven’t seen each other in person in two years, but we’ve known each other a long time. So we already had that relationship. But if you and I never met in person and we’re just sitting here on a Zoom.

[Hildebrandt] Yeah.

[Hummel] I think our relationship would be different.

[Hildebrandt] I do too.

[Hummel] So how do you think about that, as a leader?

[Hildebrandt] I think, like we see it with our salespeople, the people that don’t have those relationships have had a much harder time via Zoom, doing their job. So that’s true. Today, I saw our receptionist in Denver for the first time in 18 months. It was really great to see her. You know and sometimes absence makes the heart grow fonder. So it’s like, not seeing these people probably gives us a better appreciation of them than when we were seeing them every day. So, I think that the key, and I would say to you right now, I think the hybrid work environment, which is where we’re heading into, is going to be far more challenging than the remote work environment. Because there’s too many precedents that get set, that cause angst among employees. And when everybody was unified in that they were all working from home, that that kind of goes away. But when you have a hybrid and certain people that are working in different places, different days, all those types of things. I think that’s going to be more challenging to go forward with. And I think one of my life philosophies is that everything’s a pendulum and it always, it always swings too far before it swings back.

[Hummel] Yeah, we go like this, right?

[Hildebrandt] Yeah.

[Hummel] And the answers in the middle.

[Hildebrandt] Almost always.

[Hummel] It’s just the pendulum has to get there.

That’s right. Almost always. And I think that’s where we are right now. I think we’ll overcorrect, I think, with a hybrid environment, I think we’ll come back to some form of new normal. I don’t think the old normal exists. I think that the things like the need to be in the office at eight o’clock and leave at five o’clock, that probably doesn’t exist anymore, because if you’re taking an hour train, you’re working remotely in most cases. It’s just, you happen to be working on a train instead of your office.

[Hummel] And frankly, as you and I have said, that’s a good thing. I personally believe it’s great that we’re not back–

[Hildebrandt] One hundred percent.

[Hummel] We wasted so much time.

[Hildebrandt] Wasted.

[Hummel] taking a useless meeting. I don’t do any useless meetings anymore. You used to go get on a plane to do an intro meeting because you felt like you had to. Now you do three Zooms and if it makes sense to get together in person, you do it.

[Hildebrandt] You do it. And you fly there.

[Hummel] So all the nonsense of travel or in-person, employees sitting at their desk because they believed that they needed to be there. I don’t know. I love it.

[Hildebrandt] Time clock. Think about it. You walk by somebody playing solitaire, because they knew they had to be in the office, but they didn’t have anything to do. They could be teaching their kid to read, during that period of time. So things like that, where I just think the quality of life aspect is going to be so much greater. But having said that, I think one of the things about the return to physical offices, the why. So what is it you want to create? What’s the why of coming back? So like with me, the why is that interaction with people. Coming back to the office to work? That’s my worst nightmare, because I have an open door policy, which means somebody is going to come to the doorframe and say, “You got two minutes?” Well and my answer, always used to be “Sure, as long as we both admit it’s 30.” And oh, by the way, it just interrupted me on what I was doing. So I mean, my quality and productivity of work went up so much because I was working uninterrupted. But a part of being CEO is cultivating those people and you know, caring for those people. And, I think there’s going to be some balance of going back to that, but when I’m back in the office, it’s going to be in a far more social role. When I have to hard work to do, I’ll do it remotely.

[Hummel] Yeah, you’re not coming in there to grind out a hundred emails.

[Hildebrandt] No. No. But I’ll come in and spend time with people and get teams together or small task forces that we’ve done on Zoom. Try to do those in person to keep that sort of, that physical touch, that physical presence, I think you’re right. I think that is critical to the experience. And I think we just don’t know where that pendulum’s going to stop.

[Hummel] Well, and you got the working parents who, you know, I’ve young kids.

[Hildebrandt] Oh my goodness.

[Hummel] I have nine-, seven-, and five-year-old kids. I can’t wait to get out of here.

[Hildebrandt] Yeah that’s my CFO, Carolyn, same thing, you know what it’s like.

[Hummel] Yeah. So Carolyn and I are in the same boat. Well, as you know, from last time and every week we ask people the last question. The beneath-the-surface question, which is to get people to understand are our guests in a more personal level. What are you most excited about, Phil, in the next 12 months? It could be related to Segall. It could be related to personal. Like, what are you getting out of bed, that we’re going to be on again, 12 months from now, you and I will be here, that you’re excited about? What’s going to happen in the next 12 months?

[Hildebrandt] I think there’s just a lot that’s going to change in the next 12 months. We’ve seen the Delta variant come out of nowhere. We don’t know what’s around the corner. I think when we go back to the office, the first time somebody coughs or sneezes is going to be a challenge, but it will run its course. And I think that, for us, we have a new opportunity with a new parent, that we can really kind of continue the momentum of growth. One of the things I’m most proud of, and I think we may have even talked about this last time. Our median age employee is about 42 years old. So we really do have a group of people that, our big focus now is really, and we’ve turned towards mentoring, coaching, and really sort of career development, because while we’re not really scaled like a BlackRock scale, we have enough now where we can create career paths for people and make it so somebody could spend a big chunk of their career here. And that excites me, because I’ve been here 27 years and I would’ve never thought I would be here this long. And maybe the 23-year-old that’s here now, is me, 25 years from now. I think that’s exciting.

[Hummel] Man. That’s awesome. Well, thank you, Phil. Thank you so much for being here. Hopefully you’ll agree to come back

[Hildebrandt] Any time.

[Hummel] You can be our first four-time guest.

[Hildebrandt] Yeah, good to see you.

[Hummel] You know, it was awesome. Congrats on the success. Congrats on the deal. Thank you so much for your friendship. It’s been awesome having you.

[Hildebrandt] I appreciate it, Jay. Take care.

[Hummel] Well, thanks for watching today. In the coming weeks, we’re going to continue to talk about how leaders lead through the change that’s coming, as it relates to COVID, culture, what’s going on in the markets. I’d encourage you to check out AIK2, our new partner, AIK2 Insurance Services, to buy insurance for your business and to meet your P&C needs. We’ll see you next time on “The Deep Dive.”

The opinions expressed in this video are solely the opinions of Segall Bryant & Hamill or an unaffiliated third party. You should not treat any opinion in this video as specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinions. The opinions expressed in this video are based upon information considered reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this video does not constitute financial, legal, tax, or other professional advice and is not intended as a substitute for consultation with a qualified professional. The opinions and statements are subject to change without notice and Segall Bryant & Hamill is not obligated to update or correct any information in this video. For illustrative purposes only.

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