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BD/IA Risk Review – September 2020

Rådgivning om selskapsrisiko|Forsikringsrådgivning og teknologi|Investments

By Brian Cavanaugh , Jack Jennings and Jeremy Sokop | September 3, 2020

Risk and insurance considerations and approaches

BD/IA Q&A with Todd Pack, Chief Operating Officer and Chief Information Security Officer, J.W. Cole

SPECIAL EDITION: This month features an interview with Todd Pack, Chief Operating Officer and Chief Information Security Officer, J.W. Cole Financial, Inc. and J.W. Cole Advisors, LLC. Todd offers his perspective on the insurance industry and J.W. Cole’s relationships with their providers. We are very grateful to Todd and J.W. Cole for sitting with us.

Brian Cavanaugh: Tell us a little about your perspective on the insurance industry. Do you view the Wealth Management industry as drawing any parallels with the insurance industry?

Todd Pack: Our perspective on insurance is that it is a critical tool for our business in many ways. First and foremost, it provides financial and psychological stability for the firm and our financial professionals. Insurance helps us manage the risk of unforeseen events and creates a type of financial leverage.

There are also parallels to our business. For example, both industries manage a high degree of complexity. We see complexity across a spectrum of issues within the firm. One example is the recruiting process and the risk-reward ratio of bringing on a new representative. What I mean is that you have to understand who the new rep is, how they operate, their business mix, how they may create value for your firm, but also, how they may create a risk for your firm. The tradeoff is probably no different than bringing on a new client in your case as an insurance broker. Insurance brokers have to fully understand their client and the risk-reward ratio.

Further to the point of shared complexities, insurance brokers deal with issues such as coverage limits and contract language. We deal with varied contract language in our selling agreements. A more specific example on the insurance side is adapting policy language to a changing set of exposures. Standard policy language may have been in place for years and no one questioned it until a complex claim situation arose – you have to be proactive and manage the needs of today. It’s always evolving, and you need to have partners that you work with to help manage these complexities.

Brian: You touched on the recruiting process a little bit. Can you talk a little more about the recruiting process and how you identify whether reps are a good cultural fit for J.W. Cole?

Todd: Sure, it’s more along the lines of “Do I feel like the things that this person is telling me are true and honest?” I want to understand why certain things are being positioned in a certain way and to understand the real meaning behind what someone is telling me. We talk a lot about the “dinner test.” Meaning, is this a person that you’d be willing to go to dinner with? If they’re in town and no one would want to go to dinner with them, then it’s very unlikely we would want to partner with that person. The culture of our firm is more important than economic gain.

Brian: How has E&O insurance been a benefit to J.W. Cole? How do you think about your partnerships with your brokers and insurance carriers?

Todd: First and foremost, clearly the hope is to never have to use the insurance policy. We want to make sure we have a partner that is there for us when we need them. We’ve been fortunate not to have many claims, but we’ve been fortunate to have partners on our side when we needed them. It is important to us to have a mutually beneficial relationship with our partners. Culture and partnership are things that other firms talk about, but often lack any substance.

What I mean by a lack of substance is that many large firms service their producers based on an assigned number and that is how you’re known. They don’t know you as a person, but as a number. We want to know our financial professionals at a personal level. In our case, we assign a relationship manager to every partner and we want to make sure every interaction with them is based on the individual; not some random routing process that sends them to the next available person. This concept should translate to our insurance carrier. We want our insurance carrier, and broker, to feel the same way about us as we do about our reps.

Brian: What’s your perspective and philosophy on hiring? How many rep and IARs does J.W. Cole perform diligence on annually and how many of those deals lead to a contract? What is your sense of how this ranks against the industry average for hiring?

Todd: As we talked a little bit about in your first question, we’re conservative in our hiring process. Cultural fit is probably the top criteria to evaluate a possible relationship with a new rep. It goes back to the dinner test.

As it relates to the numbers, that is more of a focus for larger firms who are focused more on headcount and not relationships. Larger firms may want to have their pipeline, I refer to it as “nose count,” but we’ve never looked at it that way. Those same firms often have internal recruiters who have specific targets and look to figure out how many deals are in certain phases, track their statistical ratio of closing rates, etc. We just happen to take a different approach.

We actually get a lot of new advisors coming to us through our existing advisors. We literally don’t have a target where we say, “We want to bring on X number producers.” For us, production, and more importantly, the quality of the business mix is what is important to us as opposed to an arbitrary goal of X producers. For that reason, generally, we don’t hire any “new advisors” per se without industry experience. We just want to focus on a handful of people that are going to be great partners for us.

When someone joins us, we want to make as much an effort as we can to give them the resources they need to be successful. We also want to make sure we have relationships with these individuals. For example, when I spoke with Alan (one of our advisers) last Friday, I want to make sure to remember him on a personal level – his son just graduated high school, he’s going to such and such college and etc. That’s more important to us than bringing on 500 new producers. Statistically, we are a top 50 firm in the nation as far as rep count. From a revenue standpoint, we’re a top 30 firm. The more successful our partners are, the more successful we will be, so we want to provide them with the resources needed to be successful.

We don’t have an inhouse recruiter or someone who has an incentive to make a short-term decision for their economic benefit. Our two main “recruiters” are actually owners of the firms. For us, if there is a problem with a Rep, it is a problem for everyone in the firms. For a firm with inhouse recruiters, they may make commitments during the recruiting process and once that rep has agreed to join, any issues become someone else’s.

Brian: We’re seeing a lot in the way of a transition from B/D commission-based business to more of the RIA fee-based AUM model. How has that translated for J.W. Cole and what has the dialogue with clients been around demand for fee-based compensation?

Todd: We certainly see the transition taking place. I find it interesting, in 1996 the advisor I worked for already had a significant focus on advisory business. There, about 80% of revenues came from asset management and financial planning fees.

You have to understand that the brokerage/transactional relationship is materially different from an advisory relationship. We’ve worked hard to develop a platform to support the different needs of our partners and supporting the migration from transactional to advisory is part of that. We’ve put extensive focus on helping the advisors develop financial planning and consulting relationships with their clients. We want to make sure our advisors have access to the tools and resources they need to help their clients achieve their overall life goals; not just their investment goals. Through a planning and consulting relationship, advisers are able to build a holistic approach for our clients. When I was at AEFA (now referred to as Ameriprise), the referral ratio was about 4:1 meaning that advisory clients provided 4x the number of referrals compared to a transactional client.

We have an entire department that supports our advisors in practice management, business development, succession planning, and have made capital contributions to our advisors to help facilitate acquisitions. Everything we’re talking about here all ties back to the idea that the more successful we can make our financial professionals, the more success that will come back to us. Making an investment in people is important.

Brian: Considering all we’ve discussed, what incentive do people have to maintain licensure as a BD?

Todd: Good question, there are certain transactions that are not designed at an advisory solution. There are one-off situations where the client may not have enough assets to be in an advisory account. Certain products are available on the commission side that aren’t available on the advisory side. I believe the broker dealer business will always exist but certainly the rate of growth in advisory is outpacing that of brokerage business.

Brian: What are the greatest risks to the firm today? Tell us about how your perspective on that has changed from a year ago.

Todd: Regrettably, there are a lot of different risks that exist. Evolving regulatory risks are an ongoing challenge as you know. Personally, for me it’s the cyber side of it. I’m probably more sensitive to it than some others because of my role as the CISO. No matter how hard we work, testing of the individual advisors’ offices, putting out continuous training programs, updating cyber policies, making significant investment infrastructure, etc.; all it takes is one person to cause significant exposure that can go unknown for a period of time. I have a policy that when in doubt, delete and pick up the phone.

For the reasons we just talked about, technology infrastructure is in greater focus. Prior to COVID-19, almost everyone worked in a centralized workforce/location. Now, most of our staff and the staff of our financial professionals are working from home and the ability to make sure the connection is secure is a major concern. To help mitigate risk, we’ve been putting out more and more communications to make sure all our connections are secure. Cyber is the one thing that keeps me awake at night for sure.

I know a lot of firms view reputation as a primary risk consideration, so I’d like to offer a comment on that too. Truly we view ourselves as an independent firm that wants to make as many options and solutions available to our advisors as possible to make them successful. We carry zero debt and really only answer to our advisors, their clients, and the regulators, of course. On that point, we don’t need to make short-term, sub-par decisions to make us look good to shareholders. We need to make long term decisions that benefit us and our partners.

Brian: What tools and resources do you view as indispensable in your role as COO of a high-end wealth manager such as J.W. Cole? Are there certain things other COOs should be thinking about or doing that might make things easier?

Todd: There are a lot of different types of industry events in which we participate. Generally, I find that these events take place in such a formal manner and setting that people are not as forthcoming as they need to be about things that are affecting them. Firms look at each other as competitors so they don’t want to share certain things that they’re experiencing. There’s not as much fluidity as I would like to see around the industry. When there’s big industry movement people will collaborate, but from the day to day there’s not a great deal of collaboration. Although I do want to say there are some groups that have helped us, namely, Lilian Morvay’s group IBDC / RIAC has been great.

When I consider resources that are indispensable to us, I look at our staff. You have to be willing to invest in human capital. The staff will make a material difference in the lives of your partners. We need to have staff that do the right thing by the advisors and the advisors’ clients. We want to create a moment of truth for the advisors meaning, we want the staff to understand the consequences of their decisions understand the perception a decision creates, and to strive to make a positive impact on the lives of our partners. It may come as a surprise, but one of the main reasons people join us are their interactions with our compliance department. You have to have great staff to make that dynamic possible.

Brian: Todd, you’ve been great, thanks a lot for your time.

Todd Pack, MBA is the Chief Operating Officer and Chief Risk Officer of J.W. Cole Financial, Inc. and J.W. Cole Advisors, Inc.

J.W. Cole Financial, Inc. & J.W. Cole Advisors, Inc. – Since the acquisition of FAA, Mr. Pack has been extensively involved in the development of the Investment Advisory business. Mr. Pack has acted as the Chief Compliance Officer and is currently the Chief Operating Officer and Chief Information Risk Officer. Extensive energy has been placed towards the continuous improvement of the Firms efficiencies, compliance oversight, business development strategies, and expanding advisory revenues.

Break Through Advisers, Inc. – (BTA) provides services to both advisers and institutions by providing 3rd party due diligence reviews of complex investments, coaching services and compliance support. Through BTA, Mr. Pack travels nationally speaking to firms and their representatives on various topics. The goal of BTA is to support the financial industry by enabling firms and advisers to minimize risk, enhance their client value proposition, and to achieve exceptional revenue growth.

Financial Advisers of America, LLC – Acting as President, Chief Operating Officer and Chief Compliance Officer, Mr. Pack was responsible for the overall operations, compliance and strategic development for Financial Advisers of America (FAA). During his time he developed the Investment Advisory department, due diligence process and all risk disclosure documents. During both SEC and FINRA reviews FAA demonstrated a forward-looking compliance approach that was merged stringent compliance protocols while highly adaptable to unique situations. Mr. Pack worked with the FinOp on financial controls, forecasting and budgeting. During the three-year period FAA revenue growth was 294%. J.W. Cole Financial acquired FAA in May 2013.

United Capital Financial Partners – As a founding member, Mr. Pack held the position as SVP of Operations and Compliance where he was responsible for the continuing revenue operations of existing offices and the assessment and due diligence of potential acquisitions. This included conducting opportunity assessments and due diligence reviews for the purpose of acquiring financial advisory firms. Mr. Pack had an active role in forecasting, budgeting, cultural fit and risk assessment. He was also responsible for working with each office on client case design which, included investments and risk management. In addition, he chaired the Product Committee that was responsible for the due diligence and training of products offered by the firm. This duty included oversight of all acquired firms and their staff to ensure the highest level of integrity was maintained. Lastly, he was responsible for broker/dealer compliance supervision serving as the Super OSJ. During Mr. Pack's affiliation, United Capital executed approximately $10B (AUA) in acquisitions.

Prior to United Capital Financial Partners, Mr. Pack managed a number of different financial services firms that include a comprehensive financial planning practice, a consulting company dedicated to helping financial professionals migrate from commission-based practices into fee based businesses, and an educational academy.

Professor of Finance and Economics – Prior to founding United Capital and relocating to California, Mr. Pack was an adjunct Professor of Finance and Economics at Walsh College of Accountancy and Business Administration in Troy, Michigan where he taught Investments FIN 403; a CFP® accredited course. Due to his career in financial services, he was able to bring real life, practical, education to his students.

United States Marine Corp – Prior to becoming involved in the securities industry, Mr. Pack served in the United States Marine Corp where he specialized in counter terrorism and security. During his time, Mr. Pack was promoted meritoriously twice (2) achieving the rank of Corporal in two years, awarded Marine of the Month, Marine of the Quarter and spent significant time in specialized training schools including Marine Security Force, School of Infantry, Squad Leader School, Mountain Warfare School and Airborne Training School. MOS: 8152, 0311, 8023

Publications – In his book, Break Away, Mr. Pack outlines the necessary steps to start and operate a business. From key business metrics to human resources to marketing, the reader will find the critically important information that you've been looking for. Mr. Pack has been featured on Registered Rep Magazine (Rep TV), placed articles with Investment News and Registered Rep, and cited in numerous articles including The New York Times,, American Banker, etc.

Education and Associations – Mr. Pack received his MBA in Finance from the Walsh College of Accountancy and Business Administration in Troy, Michigan, and a BBA in Finance from the University of Michigan in Flint, Michigan. He also graduated from St. Clair County Community College where he earned an AA in Criminal Justice. He currently holds FINRA Series 7, 63, 99, 24 licenses, and the NASAA Series 66 Investment Advisers Law license in addition to life insurance licenses with variable authorized.

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