Don’t Gimme Shelter
As a tax wonk, however, he was in the right place at the right time. In 1986, a year after he started, a lot of people suddenly found themselves in tax shelters that had turned into tax traps thanks to sweeping changes heralded by the Tax Reform Act of 1986.
Built for the tax regimes of the high bracket Jimmy Carter years, these shelters were mired in illiquid assets like apartments, oil equipment, livestock and even beans, and then sold to the wealthy by advisor marketers who were likely long gone after selling the structures. “You’re talking about an era of 70% tax rates, pre-Reagan era,” Griege says. “Apartments, industrial properties, oil properties, jojoba beans [an agricultural commodity whose golden oil was floated as an industrial product—an answer to the loss of sperm whale oil in the 1970s], equipment and energy packages … cattle.”
These shelters, largely structured as partnerships, he says, were sold to clients by specialty advisors to generate losses through depreciation and thus weatherproof people from taxes. They were not really meant to be investments to turn a profit, and investors could write off multiples of their losses, turning a $100,000 investment into a $250,000 deduction from other income, says Thoele.
When 1986 rolled around, a sweeping tax reform act gave tax laws their biggest makeover in a half-century. The tax code was simplified, but the loopholes squeezed shut. Investors could no longer take large losses for businesses they weren’t actively participating in, and the shelters became traps—money losing tar pits.
Before 1986, says Thoele, “investors could put $100,000 into a tax shelter and they would immediately get to write off a deduction of $200,000, $250,000. And in a 50% tax bracket, they had saved as much money as they had put into the investment. So in 1986, [Congress] disallowed what they started calling passive losses … it created a tax problem for a lot of people. They said these passive losses are only allowed to the extent you have passive income.”
It killed a lot of real estate enthusiasm, and a lot of real estate (not helping the looming land bust, which S&Ls, promiscuous lenders as they were, would amplify to grotesque proportions). These macroeconomic forces were both good and bad for the fledgling RGT, however.
Eventually clients in a state like Texas where hard-asset investments were favored came to value liquidity and diversification. RGT’S revenue mix began to more closely resemble traditional RIAs. “in the mid 1990s, our portfolio management fees based on AUM became a larger portion of our firm revenues than other fees for financial planning or other projects,” Thoele says. “Today, the financial planning fees are still significant, but AUM related fees are much larger.”
In Play
And while their youth might have given pause to old oil guys, it was no big deal to, say, 22-year-old athletes. To a few young, imminently wealthy football players, it turned out, Griege and Thoele were gray eminences.
Griege met his first sports clients serving on the board of a local youth home along with members of the Dallas Cowboys, and he got to show off financial acumen as treasurer. One member of the team came to him with both tax shelters and rental real estate woes. “His first advisor had got him hooked on the rental income market. So he had four or five different rental houses. He was dealing with tenants and keeping places filled and the tax effects of depreciating real property and not necessarily liquidity.”
The football player asked Griege to hunt down a new sports rep, too, and after interviewing one agency, the RGT cup soon runneth over with sports clients. Eventually, athletes would go on to represent almost one-third of the firm’s business and help make its name in the ’90s. “We had clients that were signed to longer contracts”—sometimes four, five or six years long, he says. “So you’ve got a source of built-in growth.”
Athletes are like any other client, he says, except their youth and impressionability can harm them. “If they become a client at age 22,” he says, “they’ve got some pretty unique needs. They don’t necessarily have the context to make financial decisions that somebody at 32 or 42 will have. So you have to find a way to accelerate their learning curve to be able to make a financial decision. Most of them have got a very compressed time frame in which they might earn the bulk of their lifetime earnings.”
If someone is a 27- or 28-year-old athlete, he or she might be out of the sport in five years and need to monetize portfolios then. “That’s a lot different from a 35-year-old business executive who might have 20 years until they need to monetize their earnings,” Griege says.
Building Different
While Griege was trying to build the business in the first five years, he would always check in with his buddy Thoele, who at the time was heading up Ernst’s Dallas financial planning division. Griege was so sure his friend Thoele, a CFA, would join him, he planned a portfolio management head position before his friend even got there. For a while, the two engaged in a war of, “Come work for me! No, you come work for me!”
Thoele finally acquiesced in 1991, taking a bit of risk himself. He walked into RGT with a 4-year-old and a 1-year-old. “I was really sort of putting not only my career but a bit of my family’s future on the line to come join Mark, who had developed some really good clients.” Thoele brought over his own big fish—a client family who had sold a very valuable piece of land north of Dallas in the mid-’80s worth some $10 million to $11 million. That was a huge goose toward the firm’s growth, and with the athletes and another large retainer client of Griege’s, the firm’s ’90s growth story began. Physicians followed. And mid-level executives.
Growing Pains
The firm first hit $1 billion in assets in 2004. Like a lot of firms, RGT faced growing pains, and in this case, clients grew faster than staff, which was stretched thin, Griege says.
“Any firm that has the growth we were having, we had to go from stretching our people further and looking at our business; our business needed to have a certain amount of capacity on the talent and service side to support an ever-increasing client base.”
In 2003, 2004 and 2005, says Thoele, “I remember a time I was thinking we’re all just as busy as we could possibly be working on clients and we don’t seem to have the time. We recognize we need more people; we don’t seem to have the time to interview the people, to hire those people. I remember very clearly the conflict.”
It was in the mid-2000s when the firm started getting offers from acquirers, says Griege, and that’s when he had a moment of clarity. “We were large enough to start getting noticed by consolidators and people who were on the acquisition side of the market,” he says. “Sometimes you need to get offers for your business to help you formulate what your strategy really is.
“We really want to be an independent firm.”
That meant another leap. The firm had to develop criteria for finding new people and figuring out how to expand the ownership group so that the generational transfer would be an orderly cascade, not moments strung together of urgency and trauma.
The firm now has 78 employees and 17 owners as of January 2, 2016. Today, Griege and Thoele, though still the majority owners, own less than 50% of the firm; between 2000 and 2007, three more people became partners and since 2008, they’ve had 10 more people come into the circle, one by merger and one by lift-out, the others by organic partner development.
In early 2014, the firm bought the local SCM Advisors, a firm with almost $600 million in assets under management, because of its familiar philosophy and client approach, and brought along its founder John Bricker as a partner. Griege and Thoele say RGT will pursue other mergers in the future, and that it’s open to growing both organically and inorganically.
“We’re very open to continuing to grow on both sides,” but he says it’s easier to do lift-outs than mergers, and the firm can’t accommodate just anybody looking to cash out. The longer term strategy isn’t necessarily to open in many different cities.
“We talk about the potential for other offices,” Griege says, “but honestly we’re in two terrific markets—northern Texas and Southern California [through a team the firm lifted out]. And we serve clients in 30 some different states. So we don’t necessarily need a physical presence in other cities.”
Their accounting backgrounds made the firm different from others and gave the culture a different color, says Griege. “What I would probably say is that the level of professionalism on the professional service side in the Big 8 context, again going back to the early ’80s, that bar was very high.”