To our Stockholders, Clients and Friends,
Fiduciary’s 138th year of operation will be remembered for its distinctive client service, record new business and continued focus on identification, recruitment and retention of great professionals.
BUSINESS ACCOMPLISHMENTS
The Company achieved its 80th year of consecutive profitability1 and continued to make progress on longer-term growth objectives over the course of 2023. Record revenues, prudent capital decisions and investments for the future defined the year’s financial results. The Company maintained its decades-long 98% average annual client retention rate during 2023. We view long-term client retention as the best measure of the Company’s client service because it incorporates the tangible results of investment returns, responsiveness, client-specific customization and is a clear reflection of overall satisfaction. This focus on client service is also critical for new business. Combined with greater brand awareness, macro trends in favor of the Company’s operating model and the Company’s structured new business development initiatives, the Company has materially increased its new business in recent years and had its best new business year ever. This is the seventh year out of the last nine in which the Company exceeded the previous year’s result. The combination of high retention and increased new business has accelerated net organic growth by more than seven times since 2014.
Several new professionals joined Fiduciary during the year. Sid Queler joined the senior management team as Head of Wealth Management. Tom Nonnweiler joined as an Investment Officer, and in New Hampshire, we were joined by Antonietta Brogna as a Trust Officer and Jill Mastroianni as a Trust Counsel.
In its eighth year of operations, the Company’s New Hampshire trust company had strong growth and concluded the year with a new record in assets under supervision. The continued combination of favorable fiduciary laws, hard work by our New Hampshire team, and the evolving trust needs of the market has made this growth possible.
2023 was a breakout year for our white-glove custody business as competitive dislocations caused several large new clients to select Fiduciary’s client-focused services. Custody revenues grew 20% due to new business additions during the first half of 2023. Fiduciary’s responsive and flexible custody services continued to differentiate the firm from the impersonal mega-custodians which have undergone significant challenges recently.
Over the past five years, Fiduciary has been recognized with more than 50 industry awards from professional organizations. During 2023, the company was awarded “Best Fiduciary/Trustee Service” and “Best Custodian” by Private Asset Management Awards. Additionally, Thanda Brassard was recognized with the “Woman in Wealth Management Banking Award” by WealthManagement.com and Aimee Bryant was recognized with the “In-House Leader in the Law Award” by Massachusetts Lawyers Weekly.
DIVERSITY, EQUITY AND INCLUSION
During 2023, the Company continued its focus on seven long-term initiatives to enhance diversity, equity, and inclusion. These broad-based initiatives are both internally and externally focused and include: 1) Education, Training & Discussion, 2) Mentorship / Internships, 3) Volunteerism & Corporate Support, 4) a Diversity, Equity, and Inclusion Committee, 5) Hiring & Promotion Practices, 6) Marketing & Communications, and 7) Measurement & Tracking.
The Company took the following actions during 2023 in pursuit of its ongoing evolution as a more diverse, equitable and inclusive firm: conducting our fourth year of mandatory Company-wide DEI training, holding facilitated brown-bag lunch discussions, continuing our corporate contribution program focused on DEI initiatives, continuing our internship programs, expanding our partnership with the Boys and Girls Club of Boston, and sponsoring several targeted volunteer opportunities.
Since raising our DEI priorities some years ago, the Company has continued to make steady progress. On December 31, 2023, the Company had 148 full-time employees. Of these professionals: 54% were female; 23% were non-white; and 21% were under 30 years of age, 43% were between the ages of 30 and 50, and 36% were over the age of 50. These statistics represent 4% more women and 6% more non-white professionals from our measurements three years earlier.
FORWARD PERSPECTIVE
Nearly ten years ago, I wrote about the impact that demographics, technology, and regulations would have on the wealth management industry in the coming years. I predicted that these macro trends would significantly influence the course of the industry. Aging demographics in the profession would increase the “war for talent” for high-quality advisors, technology would continue to increase productivity and make it easier for smaller providers to compete, and regulations would increase expenses.
In many ways, these prognostications are playing out as expected with a few exceptions. Back in 2014, no one could have expected the Covid-19 pandemic and how it would act as an accelerant to the demographic and technological changes within the industry. Nor did I foresee the tsunami of capital flooding the industry from private equity investors purchasing wealth management firms largely due to low interest rates and aging baby boomers looking to retire.
Disappointingly during this period, the services provided and outcomes delivered to clients across the industry have only incrementally evolved. While client communications were transformed by the pandemic (e.g., Zoom), the majority of active investment managers continue to lag standard benchmarks and the majority of clients continue to be served by conflicted providers with less than comprehensive approaches.
Having observed these changes over the past decade, I have refined my point of view regarding the wealth management industry’s future. While demographics, technology and regulations will continue to influence the industry, what is apparent is that the biggest driver of future change will have to be led by the consumer (i.e., wealth holders). In many ways, the biggest impediment for better services and outcomes for clients are the clients themselves. Furthermore, many of the unique industry dynamics within wealth management are due to consumers’ behavioral tendencies.
To say that the biggest challenge to the industry’s continued evolution is the consumer is a strong statement, but I say this primarily because of what I see as the industry’s purpose. I have spoken in the past that I view this profession as a noble profession and as a people business. At its core, wealth management is about hiring another person to advise or make decisions independently on your behalf. What should I invest in? How do I minimize taxes? Do I have enough money to pay for my grandchild’s college? Who will oversee my family’s finances when I am not here? As a result, unlike a manufacturing business, this industry is inherently about the complexities of human dynamics. Confidence, pride, generosity and empathy — or lack thereof — influence the success or failure of a client working with a wealth manager. Since these are at the core of every client relationship, they are also at the core of long-term industry dynamics.
Nowhere is this human dynamic more apparent and more influential to the industry than the client buying process—when a family or individual evaluates, compares and hires a wealth manager with whom to work. Behavioral sciences have studied the flaws in human decision making and examined the heuristics, biases, and framing of decisions to try and make sense of seemingly “irrational decisions,” and through this behavioral science lens, wealth management’s structural impediments become clearer.
The factors at play during the buying process in wealth management are unique. Given the labor-intensive process of transferring from one advisor to another (i.e., high switching costs), most families infrequently undertake this process. Furthermore, due to privacy and discretion of personal wealth, most families keep their process to themselves or discuss it with a small trusted few. This leads to limited information sharing across potential consumers. Add to these factors the reality that many families lack clarity on what defines a “successful” relationship with a wealth advisor and what results they prioritize. For example, would you prioritize 2.00% additional annual investment performance, or higher confidence that your child has a healthy relationship with money? These are not mutually exclusive outcomes, but it is much easier to quantify the former, while the latter is probably more important to most parents.
To top it off, wealth managers do not make the evaluation process easier. Almost all providers use similar marketing language when describing very different offerings. Insurance companies, brokerages, retail banks, mutual fund companies and financial planning firms all use the same terms when courting prospects, but have very different corporate structures and objectives. In the absence of being well prepared or experienced in evaluating wealth management firms, prospective consumers group these divergent firms together and rely upon the provider’s brand. These well-crafted brands validate consumer’s decisions despite the reality that many of these brands are only loosely connected to the images prospective clients may perceive. For example, one large publicly traded financial behemoth presents its wealth management services as emanating from a bespoke boutique from the 19th century. Given that the firm is the conglomeration of over 1,200 predecessor institutions, the connection between the brand positioning and the current institution is tenuous.
An additional defining characteristic of the wealth management industry is that it is so personalized. Every family is different. Even though there are commonalities across clients (i.e., recent retirees, new parents, etc.), the facts and circumstances of each individual are unique. Furthermore, the primary value provided to each client is dependent upon a strong, personal trust between the advisor and client. Not surprisingly, the most important selection criteria cited by families when picking an advisor is that the advisor is “perceived as being honest and trustworthy.”2 This reality leads to several important industry implications. First, the ability of one human to discern the character of another is difficult under any circumstance. History is full of examples of misplaced personal trust and, unfortunately, wealth management is no different.3
This reliance on the personal assessment of the advisor is a reason that small one-person RIAs can credibly compete with mega-wealth management companies. Clients do consider an advisor’s association with a well-known brand or company, but many prospective families prioritize more highly their own judgement of the individual advisor’s character. Given the relative ease in establishing one’s own firm (i.e., low barriers to entry), and technology that is continually driving operational costs lower, it is not surprising that the majority of SEC-registered firms are small RIAs with fewer than 10 employees, and that 70% have less than $1 billion in client assets.4 The importance of this personal relationship between the client and advisor also limits each firm’s scalability because there is a threshold at which an individual advisor cannot effectively serve incremental new clients—despite all the technological tools available to increase productivity. This makes for a structurally fragmented industry with increased variance in the quality of service provided to similar clients.5
Industry fragmentation is not the only structural dynamic due to the preference to prioritize the advisor over the firm. For example, the fact that most families are served by institutions with significant conflicts of interest in serving them seems at odds with what most would likely want.6 These conflicts of interest come from multiple sources, such as hidden fees, retrocessions and selling proprietary products. Additionally, a noticeable number of families are served by firms that don’t place the interests of their clients before their own profit making (e.g., brokerage firms). While the less-conflicted RIA channel has grown significantly, if one believed that alignment of interest was a rational requirement for selection, clients would not have selected these conflicted firms initially or would be actively transferring away from them.
Realistically, it is unlikely that material changes to the wealth management industry will occur without greater information available to families to help them compare advisors. This may be dependent on changes in cultural norms regarding sharing of experiences between families, which may only happen with the next generation. Indeed, it may be the combined effects of demographics, technology and regulations that prod families to change the industry. The next generation of wealth holders make decisions differently than their parents. They are technologically more adept and more likely to seek broadly shared consumer information (i.e., Uber ratings). Technology certainly will play a factor in information sharing as seen with other industries. It may also reduce the difficulty in switching from one advisor to another through new operational processes (i.e., blockchain applications). New regulations may also accelerate this, although too often well-intentioned regulations miss the mark and have unintended consequences that diminish competition and increase costs. However, increasing thresholds to launch an RIA or requiring all professionals to attain some professional designations (e.g., CFA, CFP) could be beneficial.
Given that these structural challenges are unlikely to be addressed soon, how should families better choose advisors today? To this, I offer four thoughts:
- Select a firm that values you, but is not dependent upon you. Successful long-term wealth management relationships are based on mutual respect and appreciation. It is not ideal to be the millionth client of a mega bank, nor the sole client of a small RIA. Boutique firms where you are valued and prioritized, but where the enterprise’s existence is not reliant on you, is the right mix.
- Select a firm focused on permanence and longer-term goals. Professionals and clients are aligned in wanting a firm that is stable and has a long-term perspective. Quarterly, or short-term management, leads to prioritizations that can be at odds with client service or happy employees. Additionally, given the time and effort of switching firms and the fact that the longer a client has a relationship with an advisor, the greater the beneficial impact that advisor can provide, underscore the need to select firms that have a high probability of being the same firm in decades to come.
- Select a firm that offers an attractive value proposition to its professionals. If wealth management is a “people business,” then it is critical that the firm prioritizes the identification, recruitment and retention of great professionals. Examining advisors’ qualifications, retention statistics, compensation methodology and gaining a perspective on a company’s culture can shed a significant light on whether a company prioritizes its people.
- Finally, be clear about what defines a successful relationship with a wealth manager for your family. It is easy to believe that outsized investment performance and low fees are the measure of success, but consider moving beyond that. The value of a professional advisor is not only stewardship of assets, but also to have an active partner in solving life’s most complex puzzles (i.e., who do I trust to help my spouse when I am no longer here?). Clarity of goals and one’s objectives for accumulated wealth should inform the partnership that will work best for you.
It goes without saying that the way to act on these four thoughts is to perform one’s own due diligence of potential advisors. Knowledge is power during a selection process, so speak with existing clients, review corporate structures, understand compensation methodologies, and meet multiple professionals at a firm to understand the corporate culture. Evaluate historic investment performance not only for returns, but also for the logic of investment decisions. And finally, understand the fees, but don’t fixate on them. Negotiating below-market rates does not necessarily lead to long-term relationships (i.e., clients should want firms to make a reasonable profit in order to reinvest and perpetuate the company).
Within the context of the broader wealth management industry and longer-term dynamics, Fiduciary has worked hard to operate with the best interests of our clients, professionals and stockholders at the forefront. As a private company with an advantageous capital structure, we have focused on the long-term goals of our clients and professionals. We have worked to mitigate conflicts of interest and align the firm with client results. Most importantly, we have always believed this is a special profession and have worked to operate at the highest standards by which we and our clients can be proud.
2023 marked the company’s 138th year of operations and we look forward to continuing to focus on the drivers for our clients’ happiness. I am grateful to lead Fiduciary and want to thank the entire professional staff for their dedication and hard work and also for their perpetuation of this special institution.
Best,
Austin V. Shapard
President & CEO
1 We believe Fiduciary has been consecutively profitable since the incorporation of its Massachusetts trust company in 1928—95 years—but do not have the records on profitability prior to WWII.
2 Spectrum HNW research.
3 One need only look at Charles Ponzi or Bernard Madoff to underline the reliance on charisma in personal financial decision making.
4 The Investment Advisor Association.
5 More consolidated industries tend to have more consistent and optimized products and services.
6 Over 2/3rd of HNW/UHNW client assets are served through the brokerage, publicly traded bank or insurance channels. McKinsey & Co.