Publications

- April 1, 2019: Vol. 6, Number 4

Buying in a down market: While Wall Street shed personnel during the financial crisis, Fielding Miller brought aboard the best of the castaways — and he’s poised to do it again

by Mike Consol

Fielding Miller, by his own admission, is not a skilled manager of people, which is why he chooses to have as few people as possible report directly to him. It was four “direct reports” at last count.

He was told 15 years ago by a friend (who now sits on his board of directors), “You are never going to build a great company until you are the dumbest guy in the room.”

“Three months later, I called him and said, ‘I succeeded in being the dumbest guy in the room, but it didn’t take as long as I hoped it would,’” says Miller. “‘By the way, I think the next time you give that advice you might want to add the caveat to make sure you own 51 percent of the stock, to make sure they don’t vote you off of the island.’”

Miller, co-founder and CEO of Raleigh, N.C.–based CAPTRUST Financial Advisors, is still the captain of his island, which has expanded to 40 offices across the United States and $313 billion under advisement, $20 billion of which are discretionary assets. And the CEO has instituted a broad ownership structure, with every personnel member who has worked for the firm three years or more awarded stock in the company as a grant. Three hundred of the firm’s 500 employees are shareholders, and since CAPTRUST’s start in 1997, shares have averaged 22 percent compounded revenue growth.

“You can do the math,” he says. “That means the stock has obviously done pretty well. It’s a big part of our culture and alignment, and one of the reasons we don’t have a lot of turnover and people are willing to hustle.”

Miller cites the firm’s broadly distributed stock-ownership program as the single most important decision he made as a leader.

“It worked,” he flatly states.

Miller speaks glowingly about the talent he has assembled at CAPTRUST. Many of those players are refugees from the global financial crisis. Miller asserts every time there is a shock to the financial system, Wall Street sheds people en masse.

“That struck me as really stupid because, if you believe ultimately that the markets are going to be better, why wouldn’t you be getting more aggressive when things are cheap, like we profess to do as investors? I told the employees there is not going to be any bonuses, but everybody has got a seat.”

Then, in the throes of the global financial crisis, Miller went after Wall Street’s best castaways, expanding his workforce about 18 percent by the end of 2009.

“We took advantage of the carnage,” he says, “and our revenue did not go down. It was basically flat. It paid off, and if it happens again, we are going to run the same play.”

The organizing principal at CAPTRUST is four operating units, the heads of which are the only people Miller wants reporting directly to him — though Miller emphasizes he makes an effort to be visible to everyone at the firm. The four operating units are:

  • The adviser group, responsible for managing the firm’s 170 advisers, as well as the firm’s marketing efforts
  • The consulting research group, which oversees due diligence, asset allocation, capital market assumptions and portfolio management
  • The consulting solutions group, focused on consulting solutions that are non-investment related, such as helping its 401(k) plan clients (1) design a plan and negotiate contracts with record keepers, (2) manage fiduciary responsibilities, and (3) get their participants invested correctly and financial planning for high-net-worth clients
  • The business operations division, run by the COO and responsible for legal, financial, HR, technology, operations and client services issues

GOD’S WORK

Historically, CAPTRUST has averaged two-thirds of its revenue from institutional clients, which it loosely defines as any business generated from 401(k) retirement plan clients, endowments, foundations and religious organizations. What’s more, the firm’s endowment and foundation clients tend to be of the $50 million to $100 million variety, with about 50 percent of assets committed to illiquid alternatives and real assets — rather than the 80 percent illiquid assets typically found in behemoth foundations such as those of Harvard and Yale.

The lion’s share of foundation and endowment revenue is manna from heaven, so to speak, as the firm represents a significant number of religious organizations. It did not hurt that Miller and CAPTRUST are located in the U.S. Bible Belt.

“We thump the Bible pretty hard down here,” he acknowledges. “It is a more religious part of the country, but the biggest contingent of religious institutions we have are Catholic diocese that are all over the country, and we have about 25 percent market share among the diocese. We also have substantial clients that represent Jewish, Mormon and other Protestant organizations. Religion is a niche.”

The key is custom-built portfolios that use screens to avoid taking stakes in companies or asset classes that offend the tenets of a particular religious group. The Catholic dioceses, for example, will not invest in companies involved in the manufacturing, either directly or tangentially, of birth control products, though they are not opposed to companies that brew, distill or ferment alcohol. By contrast, the Mormon church is opposed to investments in alcohol, as well as tobacco.

“We have managers who can run custom screens that match up well with the philosophy of these religious organizations, so it is a highly specialized consulting approach,” Miller explains. “Do it well for one, you get introduced to the next one and the next one and the next one. We have had a lot of success there.”

Though only one-third of the firm’s revenue is culled from private wealth management currently, that is changing; CAPTRUST’s private wealth business is growing faster than the institutional side, primarily because of the firm’s acquisition activity.

“We have built out a network of institutional offices around the country, and that is how we got our national footprint,” says Miller. “Now we are going back into those same markets and acquiring wealth management RIAs to partner up.”

He forecasts revenue parity will be achieved between the private and institutional sides of the business in three to five years.

HUMBLE AND AUSPICIOUS BEGINNINGS

Miller’s first job in financial services, following graduation from East Carolina University, took him to North Carolina National Bank, which later became NationsBank, headed by the flamboyant and redoubtable Hugh McColl, with whom Miller had a few brief encounters. (McColl stunned the banking business when he grew NationsBank into such a powerhouse it “merged” with Bank of America and subsequently adopted the Bank of America name. McColl moved Bank of America’s headquarters from San Francisco to Charlotte, making North Carolina’s Queen City the second most prodigious U.S. banking center, behind only the Big Apple.)

“He is quite a remarkable character,” Miller says of McColl, now 83 and retired in South Carolina. “He had a heck of a run.”

Miller spent a few years at NationsBank and found his way into the brokerage business during that stint. That was followed by a decade with Charlotte-based Interstate/Johnson Lane, a regional brokerage firm that later was bought by Wachovia Corp. before being acquired by Wells Fargo & Co. Miller started as a retail stockbroker and a few years later became interested in fee-based investment consulting opportunities, rather than being a commissioned broker. Along the way, he earned his Certified Investment Consulting designation from the University of Pennsylvania’s Wharton School in pursuit of his interest in fee-based advice, primarily for institutionally oriented clients, 401(k) plans, Keogh plans, endowments, foundations and other strategies that required investment policy statements, asset allocation, and the hiring of third-party managers to execute the plans and meet reporting requirements.

“Virtually all institutional relationships are run that way, but this is back in the late 1980s, and that sophisticated approach was only really available to the largest pools of assets,” he says. “My vision was to bring that level of sophistication down to smaller to medium-size companies.”

Miller was not thinking about starting his own firm at the time. “I was just trying to pay the bills,” he says. Nor did he have an iconic firm in mind for whom he wanted to work. The environment was dominated by regional brokerages and wirehouses, and all were focused on transactions. Fee-based consulting did not even register as a revenue item because it was so small, and nobody was pioneering that path at the time.

Still, Interstate/Johnson Lane recognized there was a budding industry of fee-based, consulting-oriented advisers and decided to create a subsidiary, dubbed CAPTRUST, capable of servicing those advisers by providing money manager research, reporting and other tools. When Wachovia acquired Interstate/Johnson Lane, it left CAPTRUST intact, but when First Union Corp. subsequently acquired Wachovia (and, incidentally, retained the Wachovia name), the subsidiary was shut down.

“By then, we had built up a pretty good practice,” Miller says. “After about 10 years we had a team of 13 people, and we spun out of the bank, went our own way and kept the CAPTRUST name.”

That was 21 years ago.

“We wanted to be the No. 1 adviser to retirement plans in the state of North Carolina — that was our big, hairy, audacious goal, and I think at the time we probably had six clients,” Miller says. “We decided we wanted to go national, so we started opening offices and acquiring other firms beginning in 2006.”

If you count independent firms acquired, plus carve-outs where CAPTRUST bought divisions of companies, as well as lift-outs where the firm recruited teams from other organizations, Miller counts 33 transactions to date.

“You’ve got to have a lot of conversations and kiss a lot of frogs,” Miller says. “It sounds like a lot of transactions, but that is over a long period of time. We were averaging about two a year up until 2017, and then we bought seven, and then last year we bought five, and this year we will do probably around five or six. So it has picked up.”

Though there has been a plethora of M&A activity among wealth advisory firms nationwide that has presumably driven valuations higher, Miller says the cost of acquisition has not been giving him pause.

“If you get the right type of firm that is a grower — not somebody who is stagnated and is looking to sunset and retire, but somebody that still has gas in the tank and wants to continue growing — we create a lot of capacity for those people because we take a lot of the workload off their hands that they have been having to deal with, things like compliance and technology and HR and even investment research. We take all that off their hands,” he explains. “We pay a very fair value up front for the business, but if they do grow like we think they are going to, they can really earn a premium. We require they take at least 50 percent of the transaction proceeds in our stock, and our stock has generated total returns for the last 15 years of 26 percent compounded. They are coming in and becoming shareholders, they are contributing, they are growing. There is a lot of alignment there, and we have a great common culture. It has worked well.”

Organically, the firm has boosted its assets under management through the aforementioned religious organizations, as well as its 401(k) business. Miller acknowledges providing 401(k) programs to employers is a labor-intensive, low-margin business, at least during its early stages. The trick, he says, is to achieve enough scale to be able to offer employers related non-investment services.

“Now the margins are as good as anything else that we do.”

What’s more, it feeds the firm’s wealth management business.

“We are not in the rollover business,” he says. “We are not looking for the retiree with $200,000, but we are interested in private clients that have at least $1 million to invest.”

MAKING ADJUSTMENTS AT HALFTIME

Miller’s mindset regarding his life’s work underwent a watershed transformation after reading a book titled Halftime: Moving from Success to Significance by Bob Buford. The premise, in summary, is people who achieve success during the first half of their lives can find significance during the second half of their lives by changing their focus from personal success to instead putting their time, experience and skills into helping others.

Miller recalls, “It was a story about a guy that had a successful broadcasting company and wanted to sell his business, have a pile of money and use it to do good in the world. But the author explained that if you want to be significant in the world, there is no better platform from which to do it than from the top of a company because you can touch so many lives.”

Miller realized, in his case, he was already touching clients, employees, the community and his firm’s vendors.

“It became obvious that we have a tremendous opportunity to be significant in the world,” he continues. “That was a complete heart change for me because, to that point, I was like everybody else: I was in the business to make money. But I had already done that, and Halftime completely reoriented my thinking toward the reason I was building this firm and the types of people I wanted to recruit to this firm and the types of things we wanted to stand for as a firm. That has been the driver for me ever since.”

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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