Regional For Now
Savant recently reached $4.1 billion in assets after changing focus from organic growth and moving toward acquisitions. It finished the Monitor deal in mid-2012. At the end of last year, it bought Paragon Advisors in Naperville, Ill., which has about $150 million. So far, says Brodeski, the firm has not had to use private equity money or even tap much of its munificent credit line.
What Brodeski and Muldowney started in a bungalow house in a residential neighborhood in 1993 has since turned into a firm with 3,379 client relationships and 106 employees laboring in 10 offices. That employee count might seem large for the asset amount, but only if you look at it superficially, says Brodeski.
“AUM levels can be deceiving as a metric for the size, profitability and success of a business,” he says. “For example, there are many advisors that have similar or more AUM than Savant with fewer team members, but their average client size may be $20 million to $50 million. [In other words] they have far fewer clients. And as such, they may have similar AUM to Savant but serve only a few hundred clients. Typically, this type of RIA may charge only 10 to 25 basis points or flat retainer fees, as the family office client has far more assets. As a result, they can boast high AUM but sadly don’t make much money.”
Kautt puts it even more succinctly.
“Our margins are damn near 40%. Does that sound top heavy?” he asks, comparing the firm to more giant concerns with 5% margins. He says the fact that the Savant staff specializes means that the firm has inverted the usual formula of having one overcompensated person at the top doing all the jobs, supported by less qualified staff.
“Our growth rates have been in excess of 20%. How can you scale that quickly if you’re top heavy? Because all that growth has to be supported by competent service professionals.”
The Future
Brodeski says the firm might do two acquisitions a year if it finds the right cultural fits. But the firm wants to be deliberate rather than go pell-mell into a national strategy with private equity money, which requires a faster pace and quicker return.
“The United Capitals and the Focuses of the world, they get all the headlines,” says Brodeski, “but they are really in the M&A business. And they’ve got outside capital [investors] that they need to deliver high returns to, and they’ve got a fairly short fuse, because within a few years they need to go public and create liquidity for that private equity venture capital type. … When you go there, it’s like a confederation of firms who really don’t have that much in common outside that they’ve taken money from a new parent company.”
To illuminate his thinking about the hub and spoke model, Brodeski says—hypothetically—that you could look at a city like Cincinnati that sits among other large population centers such as Columbus; Lexington, Ky.; and Indianapolis. Such a place would offer access to satellite offices within an hour by car or plane. But there are no deals there now. The focus is still tight and regional.
“I mean right now we still think there’s a ton of opportunity in the Midwest right where we’re at,” says Brodeski.
Muldowney says that all he had in the beginning was the vision but that he would have to hire people smarter than he was to implement it, and that was to create the trust people have with their doctors in a planning setting.
“Right now,” he says, “not only do we not trust Wall Street, but our institutions. We don’t trust our governments, we don’t trust our municipalities. We don’t trust many of our corporations; the church has certainly come out of this with a couple of black eyes, and the institutions have been damaged. So what people want is someone they can trust, and specifically when you’re in the position where you don’t sell a product people are willing to bare their soul.”