Kathy Freeman Company’s Leadership Q&A Series is an ongoing set of interviews with investment industry leaders from Asset Management, Brokerage, Wealth Management, Investment Consulting, and Fintech. This series was launched in celebration of Kathy Freeman Company’s 25^th anniversary. It is designed to provide perspective from key industry influencers about the evolution of their market segment over the years, projections on opportunities and challenges ahead, and leadership insights gained throughout their successful careers.

Derek Burke, CEO & President – FSC Securities

As CEO & President of FSC Securities, Derek Burke leads the 25th largest independent broker-dealer in the U.S. He is responsible for the strategic direction of FSC’s business and for executing growth initiatives. Before FSC, Derek was President of Waddell & Reed, Inc. Earlier in his career, he held executive positions in both the wealth and asset management industries as Managing Director of UBS America’s Wealth Management platform, Chief Operating Officer of New York Life Investment Management and Chief Compliance Officer for Prudential’s Private Asset Management business. Derek started his career as an enforcement attorney with the U.S. Security & Exchange Commission’s New York office and also worked in litigation at Collier, Jacob & Mills, P.C. Derek earned his law degree from Rutgers Law School and a Bachelor of Science degree in Finance from Seton Hall University.

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How do you lead a business today as a result of your cumulative experience?

“Today, all leadership positions in financial services are much more encompassing and complex than they were 10 to 20 years ago. No matter what you’re doing, it’s no longer sufficient just to be a good sales or marketing person. You have to fundamentally understand the business. You need to be more proficient in a lot more fields than in the past. You also need to build really strong teams. You can’t be a subject matter expert in everything, but you do need a firm grasp and awareness of areas of expertise. That’s why a great team is so important.”

How big of an impact will consolidation have on wealth management?

“It’s going to be significant. The greatest driver of consolidation is fee compression and transparency. In many respects, it will be about scale going forward. And it’s not only about scale in the true financial sense of the word, where greater infrastructure allows you to drive down your variable costs and increase your margins. Scale is about the sophistication that’s required to run a bigger, more complex business. To achieve scale, you’ll need the expertise to build a technology platform that will compete with firms like Schwab and Fidelity. You’ll need operational efficiencies to be able to run like a big operation and drive down costs.”

How has the wealth management business changed over the years?

“It’s a heck of a lot harder being in wealth management today than it’s ever been. There is increasing complexity, whether it’s technology, regulatory matters, fee compression, and there’s just more competition. The upside is that there will be consolidation. There will be fewer winners, but those winners will have pretty significant positions relative to scale.”

How will that impact wealth advisors?

“For advisors who operate their business as a hobby, it’s going to change dramatically. If the business is run by a senior patriarch who works a couple of days a week, that’s not going to work going forward. Because the industry has gotten more competitive, firms are reducing fees and clients are noticing. They’re asking, “Why am I paying $10,000 annually to meet with you twice a year and have you take me to a nice lunch?” Those advisors don’t really have a compelling value proposition. They are going to be challenged. What’s likely is that more firms and old-school advisors are going to leave the businesses.”

What impact are robo-advisors having on wealth management?

We’ve already seen a lot of the impact. The robo-advisor concept has really helped clarify the different components of wealth management. Robo-advising is just one of four or five elements of the wealth management experience for a client. The investment advice may be worth 25 or 35 basis points. If you’re an advisor, you need to ask yourself where you are adding value and how much that is worth. If the market is clearing at 25 to 30 basis points for that component of the client experience, and you’re caught charging 100 basis points, that’s not sustainable. Some advisors are going to be threatened by that transparency and the lack of a value proposition. For firms that understand how robo-advising is changing the market, it will create opportunity. Ultimately, it will make the industry better. We’ll have fewer advisors and firms, but they will be better.

What role do you see technology playing in wealth management?

“We’re going to see fewer firms and significantly more automation. There’s going to be a next generation of intelligence – it may or may not be AI – but the whole wealth management experience is going to be smarter and more efficient. You’re going to see a much more automated, mechanized process for providing new services. You’re going to have fewer advisors supporting more clients. As a result, advisor compensation is going to adjust accordingly.”

How will human touch remain part of the process?

“With robo-advising, you’re also seeing a revaluing of the importance of personal service and human interaction. The challenge is creating a cost model in which you can deliver service. Clients definitely want that. If you give away everything for free, which is what Vanguard and, to a lesser extent, Schwab and Fidelity are doing, you must figure out how to pay human beings for that time. With consolidation, better technology, and more automation, there’s going to be a repricing of compensation for investment professionals who deliver service.”

How do you make the investment industry more attractive to the next generation of advisors, Millennials in particular?

“Young people don’t want to commit to a commission-based business because that’s not the way they think about the world. However, younger people absolutely want to go into an industry where they’re presented with complex, challenging issues and can help people achieve their goals. So I just think it’s how you frame the argument. If your growth model is expecting advisors to cold call the way it was done 20 years ago, that’s just not going to work. The job has to be positioned and structured properly. However, the industry remains highly attractive to people interested in building an exciting and dynamic career.”

How does FSC attract and retain talent given today’s full employment market?

“These are very difficult days for recruiting talent, but the opportunity starts by clearly articulating the vision for the business and for the individual. I always think you’re selling a vision, and it has to be done with passion that genuinely reflects your own enthusiasm for what’s possible. There are clearly items that are table stakes people will check off. But then there are the more qualitative questions. Is your firm unique, and is it the real deal? Does your culture reflect who you really are and support career growth? Do you really have talented people? Most of us are looking to learn from our colleagues, so that’s really important. At the end of the day, it’s vision, it’s passion and it’s culture. And then I think there is an equity component. You have to let people share proportionally in the rewards of the business. Another key to retention is specialization and segmentation. It will become increasingly important for people to understand how they want to spend their time and if they are going to play to their strengths. Do you want to spend 80% of your week working with clients? Or do you want to spend 80% of your week building a business? Those are not consistent. You can’t do both, especially over a long period of time.”

With so many advisors set to retire soon, how does FSC think about transferring institutional knowledge from one generation to the next?

“I hate to say it, but many advisors really don’t have anything worthwhile to pass on. That sounds a bit tough, but it’s the 80/20 rule. 20% of our advisors are probably doing 80% of our business. So we have to replicate their institutional industry knowledge. We’ll provide transitional support, help them find the next generation of advisors, bring them in, train them, and make them junior partners. We’ll cultivate them to become the next generation of leaders. They won’t do it on their own. We’ll do it together.”

What are the critical leadership skills in a market where the 80/20 rule sets the ground rule?

“I think it goes back to my first answer. The game has fundamentally changed, and the required skillsets are vastly different. The industry is more complex, and the sales process takes longer, but ultimately, this is a people business. You have to connect with individuals, and in my case, with advisors. You need to understand how they run their business, understand what’s important to them and be empathetic. You need to have a strong service ethic, whether in a corporate role or as an advisor. You need to be smart, hardworking, articulate, and personable. All of these are essential to be a successful leader in today’s business environment.”

What makes you excited to get up every day and take on the world?

“There is tremendous opportunity ahead that’s very exciting for me, for FSC, for our advisors, and for the industry as a whole to create a slightly different playbook – one that really forces you to assess a much broader marketplace and take into account those different factors. I’ve always liked big challenges. Looking ahead, there is great opportunity for those folks who are willing to step up to meet those challenges.”

Kathy Freeman Company’s Leadership Q&A Series is an ongoing set of interviews with investment industry leaders from Asset Management, Brokerage, Wealth Management, Investment Consulting, and Fintech. This series was launched in celebration of Kathy Freeman Company’s 25^th anniversary. It is designed to gather insight from key industry influencers about the evolution of their market segment over the years, projections on opportunities and challenges ahead, and leadership lessons learned throughout their successful careers.

James Carney, Head of Business Analytics – Morningstar

James Carney is a serial entrepreneur, CEO, a builder of tech-enabled business and a recognized Fintech leader. He is currently the Head of Morningstar’s Business Analytics unit. Previously, James founded ByAllAccounts, a data software and analytics firm he sold to Morningstar in 2014. Prior to that, he launched tech startup companies including Workgroup Technology Corporation and Bidder’s Edge, Inc. In this Q&A with Kathy Freeman Godfrey, James shares his perspective about technology, leadership and the future of Fintech.

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What are some of the key trends you’re seeing with regard to technology and the investment industry?

“The industry is undergoing a digital transformation on three levels. First, we’re moving operationally from manual to digital. We’re getting more streamlined in how we do things. Second, the user experience is being redefined. Increasingly, the user experience is a digital one. Third is deep customer engagement. Engagement is about giving users the ability to take a specific action – transfer money online, request a white paper, or contact a wealth advisor. The goal is to make things more predictable and remove friction from any transaction. This digital transformation is a major shift that is affecting companies in the investment industry, as well as the entire global economy.”

How does this transformation benefit firms in the investment industry?

“It is making them much more efficient. They are realizing greater operating leverage. As important, digital transformation often improves the user experience, so that’s a double win. When you accomplish this, you create a great brand. A strong brand increases the likelihood people are going to stay with you and do business with you again and again.”

What do companies need to do to strengthen their brand as technology redefines business and the customer experience?

“An existing brand could be 20 years old or more, but today, you have to build a digital brand as well. The digital brand has to match the quality and consistency of your legacy brand. This is critical to long-term profitability and viability. Millennials and others won’t have anything to do with you without a high-quality, digital brand.”

How is the investment industry doing with digital transformation?

“Fairly well, actually. The amount of effort and resources being devoted to digital brands is substantial. We’re seeing that reflected in job titles. Five to ten years ago, there weren’t very many Chief Digital Officers. Now, probably 40% of firms or more have a Chief Digital Officer. In some cases, they report to a CEO, the CMO or both. The point is that the role is focused on the whole digital transformation of the business. That’s where the industry is really investing. They’re not just spending dollars; they’re putting someone in charge to spearhead their efforts.”

As a fintech leader, what impact is innovation and technology having on the business models of investment industry firms?

“Fintech is truly disruptive. Because we are changing the business model, we’re changing both the cost and revenue sides of the equation. We’re treading on new ground, and the path is not always clear. During the transition, you may not get the full benefit from a profitability standpoint, but you have to do it to get there.”

Does digital transformation mean less or more interaction with clients?

“I think there will always be engagement with a live human in some form or fashion. But the need to talk to a real person should decrease if we do this right – if it is a quality customer experience. You should be able to get the answer the first time, so you don’t have to make a phone call 80% or 90% of the time.”

How is digital transformation guiding what you’re doing at Morningstar?

“It’s interesting. Morningstar has been in digital transformation mode almost since day one. They initially put fund information on paper and then on CDs. The minute they got into CDs, they were in the digital world. They have continually innovated to allow clients to create their own digital experiences, whether its supplying big data, APIs, widgets or portfolio analytics. For us, the digital world is our world. That’s where we live.”

Do you think your mandate at Morningstar is to help asset management firms adapt to AI and other innovative technology?

“Yes. The good news is that asset management firms and others in the industry are very interested. The reason is straightforward. They’ve been under siege. The whole active versus passive debate has placed significant margin pressure on active managers. They are having to adapt their business models, including going direct to investors.”

Will firms that previously sold through intermediary channels succeed in going direct to investors?

“It depends. Technology is an enabler, but marketing costs – generating demand – is the tough part. Some well-known funds probably have the budget, but most of them can’t afford marketing costs of $20 million or even $40 million a year. It’s challenging because asset management firms are also telling the marketplace they have to take costs out of the model. The optics of a big marketing spend can send the wrong message.”

Is there anything else you would like to add about your work at Morningstar?

“Morningstar has always focused on serving investors, either direct or indirect. To achieve that, we look at lots of data, and we continually ask ourselves: How will this help our clients? How do we use our business analytics to provide more insights? What have we learned that we can share? All of this work has produced a very good outcome — the development of a global risk model. At the end of the day, everything is relative to risk.”

What leadership skills are necessary to operate in a digitally transforming world?

“We have to listen to what others are doing, particularly start-up firms. They can teach us a lot. Whether they make it is not as important. The point is that their efforts can get us thinking about innovation in a different way. What are the problems emerging that other companies are addressing? How could we flip them on their head and do it differently?”

What other leadership traits do you think are essential today?

“Leaders need the courage to fail soon and fail often. You’re not going to have big wins without swinging the bat and missing. At a smaller, privately-held company, that’s more acceptable than at a big, publicly-traded company where everybody’s watching. I personally don’t think publicly-traded companies should be any different than the startups. At Morningstar, we’re willing to take chances, and we’re willing to fail.”

But do you think leaders in the investment industry are willing to fail today in order to innovate?

“Some executives who have been in the industry for 20 years are willing to consider change. They are not dinosaurs. They’re willing to say, “Maybe I don’t have all the skills, but I’m going to get the people who do have those skills.” That’s the job of today’s leaders – identify talented people and recruit them. That includes bringing in people with different styles – people who are willing to push the envelope. It’s really up to the leadership of the firm to make that happen.”

With the tight market for top-tier talent, what do you think motivates people to switch firms?

“When I’ve seen folks move, it is usually for a new challenge. They want to do something they haven’t done before. That means helping a firm enter a new geographic market or roll out a new product. I’ve also seen people move because they want more autonomy. They want the opportunity to be more creative and think out-side-the-box to solve problems. People today are really much more conscious about making a “good move.” Greater challenge, more autonomy and the opportunity to be creative are the key drivers.”

How should the industry attract more Millennials, many of whom are choosing more exciting industries like technology?

“Millennials are very willing to work hard, but they want to have a voice. It doesn’t mean you have to do everything they want. But it’s important to listen to their ideas. They want an opportunity to participate and contribute. They don’t want to be stuck in a cube doing the same thing every day without any challenge.”

In terms of industry consolidation, who is winning and who isn’t?

“The firms that are winning have created a team and infrastructure to pursue opportunity rapidly and create a better user experience. The firms that are losing are not investing to the same extent. I think that’s going to drive more consolidation, especially in the RIA space. As firms consolidate and get bigger, it will get harder for smaller firms to compete. Larger firms will have more money and expertise. I think smaller firms could be in a very tough position as the market continues to evolve.”

What motivates you to take on the world each day?

“I want to leave a mark on the world. It may be tiny, but I want to be able to look back and say I provided or created something of value. I made something better. That’s very important to me. And, of course, working with smart people is a real motivator. I’m still learning every day. As long as you’re learning, things are good.”