An AdvisorHub Interview with Christian Hyldahl, President of Varium Investment Partners
Regarding the structure of your OCIO business model — your model seems unique, and actually allows large advisors to participate in the growth of your company while alleviating them of many of the hassles of traditional asset management.
We call it “Insourced CIO” or “Turnkey OCIO.”
Operationally, we looked at all of the TAMPs and OCIOs available in the marketplace and took the best parts of them and left the shortcomings out. We combined them to make what I believe is the first customizable, end-to-end, institutional quality investment offering available to retail advisors.
What really makes us different is our economic model. We made the decision that we need partners focused on the things we don’t do well while we focus on investment strategy and implementation as we believe it is impossible to do both well. True partners share in the economics of a successful business. We have made 50% of Varium’s equity available to our “advisor partners.” They can earn equity as Varium is profitable and our relationship with the RIA is profitable.
So essentially an advisor who participates can exponentially increase their net worth?
When we execute our plan, we will have successfully accomplished 3 things for our advisor partners:
- Increased their annual free cash flow (increasing the value of their firm).
- Doubled the value of the RIA firm through equity ownership in the Varium Partnership.
- Improved their investment process and results.
We do this at their current level of AUM and at no additional cost to the RIA.
Are there any conflicts of interest or downside to this new model?
Having an equity stake or economic interest in any advisory business-related activity requires disclosure on the RIA firms ADV. We have sample language available for advisors to vet with their compliance people or attorneys.
RIA firms will make money — in some cases, a lot of money partnering with us, yet in many cases we lower the cost of the investment management solutions the client pays; in others we are a comparable cost investment solution.
In almost every case, we deliver a better outcome for the advisor and their clients because we deliver greater portfolio efficiency in utilizing world class third party managers, higher tax efficiency by using individual securities instead of mutual funds so we can tax loss harvest, and we make the portfolios work harder using covered call strategies and portfolio protection strategies.
Rather than trying to hide the relationship, we ask our partners to celebrate the partnership and advertise the Varium team as their investment team on their website. We have 2 PhDs, multiple CFAs and over 150 years of investment management experience. There are not many RIA firms of any size that can replicate the credentials, experience, and expertise of the Varium team.
Other than the need to disclose the economic benefit advisors receive, this is a win for advisors and a big win for their clients.
How does a CIO advantage advisors in a heightened regulatory environment? Specifically regarding RegBI matters?
In my experience from looking at dozens of advisor portfolios and investment strategies, a good percentage — say 80-85% of advisors understand and TRY to follow the principles of modern portfolio theory and diversification. The sad fact is, 99.5% of them do a terrible job on the implementation, monitoring, rebalancing, and reporting of the well thought out strategy.
It’s not that they can’t, it’s that the amount of capital, both monetary and human that has to go to an institutional level portfolio management system is beyond most advisors.
For example, most advisors still use mutual funds because they are easy for advisors to implement their investment strategies on behalf of their clients.
The problem for advisors, and ultimately for their clients, is that mutual funds are a horrible way to invest. They were invented in 1940 and served their purpose. What other 80-year-old modern technology do you currently use? None. Mutual funds are expensive, opaque, tax inefficient, and don’t trade. Mutual funds are dead, I just don’t think anyone told the advisors or the mutual fund companies that yet!
The way advisors manage client assets in the future has to change. If those changes are not pushed by the regulators, then they will be pushed by technology or by the increasing expectations of clients themselves.
Advisors have a choice — spend a great deal of time, money, and effort to build systems to deliver an institutional level investment solution or outsource it to a third party to manage the investment process for them.
WE happen to think none of the existing models offer an optimal choice for advisors. They either burn money or they give away all the economic value of the investment management to a third party.
Varium Investment Partners represents the future and the next evolution of the investment management business — professional investment management strategy, execution, and implementation that generates a huge asset and a massive ROI for both advisors and their clients.
How does Varium’s CIO offering differentiate itself from one of the large CIO players?
Operationally, we deliver everything any TAMP or OCIO does, we just believe that our delivery is better.
The biggest difference is our focus. We are only interested in partnering with 10-12 high growth firms and literally be their “everything” when it comes to their investment strategy, process, and implementation.
This allows for a level of integration that provides our advisor partners the ability to deliver a totally differentiated investment offering that not only sets our advisors apart from all their competitors, but also creates first derivative benefits to marketing and business development.
We are not just an investment solution; we are a growth solution.
Oh, we are also a massive value creation solution too!
What about the RIA business model? How do you think it will grow or change moving forward in light of COVID and market volatility, and how have you adapted (or not) Varium’s business model to meet the challenges advisors face going forward?
COVID certainly increased the willingness of advisors and RIAs to change and adopt technology. I don’t think it fostered innovation yet, rather it forced a very reluctant group of people to adapt and adopt technology that enabled them to continue to service clients.
There is no question that the RIA, or fiduciary, model is going to be the dominant, and perhaps the only business model that survives. Commission-based products and the brokers who sell them are the “walking dead.”
I think you are going to see a massive bifurcation in the industry into the massive and the very small; we are already seeing it. Aggregation will continue and there will be a dozen or so massive RIAs, but advisors seeking some level of independence within the fiduciary model will also grow. More goods and services will become available to allow even small independent advisors to offer world class products and services to their clients at a reasonable price. Again, we are already seeing it and that will only accelerate in the age of COVID — I think Varium is one of those services.
As far as Varium, all of this plays into our model. We have been a remote based company from the beginning. Technology is our friend and we embrace it. All of us have strong programming capabilities and where we can’t build it, we buy world class technology to allow us to massively scale our business.
As far as volatility, we love it! First, we believe in portfolio protection, so down moves in the market actually help us compared to generic long-only models. One of the hardest things initially has been convincing advisors to adopt us as a new investment offering when what they have been doing has worked well for so long. The market basically went up gently to the right for 11 years and advisors were, rightly so, reluctant to call their clients and say “things are going great, we are changing everything.” The market is back at new highs, which is a whole other interview, but we see stormy times ahead and very difficult markets for years to come.
We believe that advisors have to embrace business models like ours if they want to do anything more than survive the next 3-5 years. Those RIAs who want to thrive should take a closer look at what we have built at Varium Investment Partners.