The Journey to Independence: Exploring the RIA Path with Peter Hughes

In this episode of RIA Collective, our host Charlie Van Derven is joined by Peter Hughes, founder of LexAurum Advisors. They discuss the advantages and challenges of transitioning from a broker-dealer to an RIA, the importance of the Golden Rule in building a successful advisory firm, and the factors to consider when joining an existing RIA or starting your own. Tune in to gain valuable insights from Peter's experiences and learn how to navigate the path to independence.

Peter Hughes
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Transcript

 00:01
Charlie Van Derven
Thank you for tuning in to another episode of RIA Collective. I'm your host, Charlie Van Derven. I've got a great guest today. My guest, Peter Hughes founded Lexorum Advisors in Overland Park, Kansas City, basically in Kansas in 2016. Peter's done an awesome job and in the seven or so years since founding that company, he's brought on 22 advisors and is building a great team. I've had a chance to meet one of Peter's advisors and Gary Chidsy was an earlier episode made the introduction. Gary's a great guy, so I get a flavor of the type of guys that you work with. Peter first before anything else. Peter Hughes. Thank you for joining me on RA Collective. I appreciate you being here. 

 00:40
Peter Hughes
Well, Charlie, I appreciate it. It was good get to know you and I look forward to doing this. 

 00:46
Charlie Van Derven
Yeah. Awesome, man. So, casual conversation. Peter, we're not trying to set any records or anything like that with downloads or maybe we will, I don't know, who knows? Really the principle of the show is to interview guys like yourself who have been through this. Right. I know you got a little history with another firm prior to that. We're not going to really bring a whole lot of that into it. It doesn't matter. We're trying to give those advisors that maybe out of college they landed at a big firm and they find themselves in a position that they really didn't expect and they want to go a different direction. We want to give them primarily the confidence to know that people have done this before, made that leap to independence, and give them resources like yourself. If they got some questions or even looking for a nice landing spot, if everything lines up, give them options for where they might be able to go with the future of their career in financial services. 

 01:40
Charlie Van Derven
Peter, first thing I'm curious about, man, what is Lexorum? Where does that name come from? 

 01:45
Peter Hughes
So, kind of a funny story. When we started the firm in 2016, we actually started it with a different name. About a week after we started that process, we got a cease and desist letter from New York City attorney saying that was not a name we could use. At that point we decided, well, we're not going to fight that battle. We wanted a name that would reflect the values and I'm talking when I say we. It was initially me and my wife and we looked around at a bunch of names. It's very difficult to come up with a new name. Right? Yeah. So Lexorum is Latin for golden rule. Golden rule simply being treat other people the way that you would want to be treated. That's what we try to do with our advisors and it's also what we expect our advisors to do with their clients. 

 02:30
Charlie Van Derven
That's awesome. It is one thing in watching the introduction video on the website. It's something that you really the golden rule is something that is really important to the you got to have a mission, you got to have a why. Right. That being the pinnacle of what you're working on. You're talking to a guy who went K through twelve Catholic school. That golden Rule, man, that was branded into us over those years for sure. I love that principle to build around and in talking to Gary and that's an episode that will publish a couple of weeks ahead of this episode. In talking to Gary, that was a big thing that he chatted about too, was the importance of knowing where you were as a person and where Lex Orum was in landing in a place that he was comfortable with. Right, so that's great. 

 03:20
Peter Hughes
Yeah. I think the culture that we've tried to establish with the company kind of comes from that Golden Rule principle. We try to get advisors who buy into that and it's so far so good. 

 03:30
Charlie Van Derven
Yeah. That's awesome, man. Peter, not only with Luxorum, but in your years prior to that in the industry, of course you've helped a lot of advisors transition. Right now with the current firm. Did I get that number right as 22 advisors currently? 

 03:43
Peter Hughes
That's about right, yes. 

 03:44
Charlie Van Derven
Okay, right. In that ballpark, 23, 24, we could trend up maybe after this. Peter is 26. 

 03:49
Peter Hughes
I don't know. Well, we do have another joining next month. 

 03:53
Charlie Van Derven
Awesome, man. That's cool, that's cool. I love to see happening in the industry. Right. As I've been working in the industry and getting to know the RIA space better and better, there's a purity to the client relationship there that in cases doesn't exist when you're with a broker dealer just because you've got biases of the firm and whatever else that gets in the way of that client relationship. Question for you Peter, as you're working with transitioning advisors, in what cases do you see it make the most sense for advisors to maybe start their own RIAA, which is something that, the amount of work that goes into that or to join a firm like Luxorum? 

 04:33
Peter Hughes
Yeah, that's an important question. I think it was just a few years ago when really it was kind of the cool thing that everybody was going to start their own RIA and there were going to be 50,000 of them. I think the bloom has kind of come off the rose on that. Still a lot of people start their own Ras. I've talked to a lot of people, a lot of advisors about that question. A couple of things that I would suggest they think about right now. At the beginning of the year, I'm spending a lot of my time. We're just filing our 13 F. We're gathering data to redo our adv. Part one then we'll have to redo our part adv, part two A and two B, and then we're going to have to do the annual adv offer letter. I see all that to explain that if you start your own RAA, one of the big negatives about that is you will spend quite a bit of time and quite a bit of money doing stuff that you probably don't like and don't want to do, even if you hire a compliance consultant. 

 05:31
Peter Hughes
There's a pain to it. That's a big thing. I'll say. One other thing that's a negative about it is you just don't have any economies of scale there. I'm talking to an advisor who might join our firm. He's got a sub $50 billion RIA. He just doesn't get very good service at his custodian because he's at the lowest rung of the lowest service level. He joins us, he's going to get a much better level of service. Obviously, starting your own RIA is absolutely the right choice for some people, but especially if you're below, I'd say, 75 to 100 million in assets, you got to understand what you're getting into on that. 

 06:20
Charlie Van Derven
I should know the answer to this question. My apologies that I don't. You're not producing, you're not in a producer role for the company. Right. You're overseeing the company, you found it and are leading the company. Are you also running a book of business? 

 06:33
Peter Hughes
I do have some clients, but that's not my primary role. 

 06:37
Charlie Van Derven
Yeah. The only reason I ask is because that's an important distinction. Right. If you start your own RA, and certainly we work with a number of sole proprietors who have started their own RIA, and there's a lot of the business going on, if you will, the administrative side of running a company like yours that gets in the way of that opportunity for growth. 

 07:00
Peter Hughes
Well, absolutely. If you are going to run your own RIA, you've got to wear a lot of hats. I think a lot of times people think that's going to be cool and glamorous, but then it turns out to be just a lot of drudgery. 

 07:14
Charlie Van Derven
Social Advisors is almost ten years old and wow. At one point and I don't mean to discredit my wife when I say this, because she was a huge help in the beginning, but at one point it was me, myself and I, and you're trying to bring on new clients and service the clients you have. We've come this far and we've got a team built around it now, and that's awesome because it gives me more freedom to do pet projects like Rea Collective. Yeah, whether it's financial services or the vendor side of the industry, man, it's a lot. My personal experience is my kids were little, so it was maybe an okay time to do it because they weren't running to sports and whatever else. Right. But, I mean, my days were 04:00, a.m. Stop for dinner, put the kids to bed, work till eleven, get back up at four. 

 08:01
Charlie Van Derven
So it certainly can be tried. What are the advantages of an advisor leaving that broker dealer world? When we look at the fee only side of the business, the RAA side, what's advantageous for an advisor to jump out of that broker dealer world or even a hybrid world, into straight fee only? 

 08:20
Peter Hughes
Yeah, really important. I'm going to give at least four. I think there's at least four things that are big positives. One is on the regulatory level, if you're with a broker dealer, you are governed by FINRA's rules. And FINRA is the framework. There is very rules based. You have to do ABCD exactly the way they say it. If you're on the advisory side, you're governed by the SEC's rules, which is the framework. There is different. It's principles based. I like to say that the SEC treats us more like an adult and FINRA is more like treats advisors like children. There's certainly still plenty of regulatory scrutiny on the advisory side, but it's different and I would say better. That also feeds into the second one, which is compliance. So that filters down. So just paperwork, which nobody likes paperwork. It's absolutely necessary. Your paperwork hurdle is going to be less on the advisory side. 

 09:20
Peter Hughes
Still a lot, still plenty, but quite a bit less. The two others that I would say your fees are going to go down. You're just expense that. Broker dealers take a note of expenses that they pass on to advisors. The Ras have quite a bit fewer. The last one is your business will have a higher valuation at the end if you want to sell. Advisory practices are worth more than commission based practices. So that's a lot of advantages. I think there are some things you have to on the other side too. 

 09:52
Charlie Van Derven
I can speak to a few other technology, right? If you're with a broker dealer and maybe it's not an independent broker dealer, maybe you're with big bank firm or something, you are using the technology they put in place versus having options on the open market. I will share with you without naming any specific names, but there is one of the largest bank brands in the world, just revamped all of their marketing technology. We've got some clients we work with, so we've watched all that happen. I think the last time they revamped their marketing technology was eight years ago. The next time they revamp it will be eight years from now. Technology is moving so fast that the open market races past the capabilities there. I would also add flexibility. We had one early interview, Rachel Burns, if you're going back in our archives, rachel's awesome, if I get it right. 

 10:48
Charlie Van Derven
She came up through Morgan and Merrill and then went independent with a merit prize. Had some health issues in the family. Her husband had some health issues and so needed that flexibility that was not get out of the quota driven world so that she could build around the needs of her family as well. So there's a lot there. I want to make one more comment on what you said about compliance, which I would actually call risk mitigation. Right. If you're one of 25,000 advisors between Finet and Wells Fargo, for example, you could be an independent advisor at Finet, but you're being governed like the riskiest advisor at WFA. 

 11:27
Peter Hughes
Absolutely. That's an interesting point because there's a lot of advisors who grew up, so to speak, on the broker dealer side of the business, and they don't realize that they're being governed by all these FINRA rules that really don't their business is 95% advisory now, but they're still in that environment. Actually, this is a funny story, but I was trying to explain this FINRA and SEC, the differences to an advisor, and he was literally 100% advisory, but he was still at a broker dealer. I was explaining these differences to him, and he actually just said to me, you're speaking gibberish to me. He just didn't get FINRA and the SEC. I think, unfortunately, a lot of advisors are so focused on investments and the clients and stuff like that, they don't realize all this, the background and the regulatory environment. I think they end up doing a lot more than they need to. 

 12:25
Charlie Van Derven
Yeah, I agree with you. The whole industry has been moving fee based for many years. It doesn't matter your affiliation. Right. It takes that commission bias out of and maybe gives the public a better opinion when you pull the commission bias out of products and products. So you make a very valid point. There's a lot of people in the broker dealer world who are already kind of 90% there. 

 12:51
Peter Hughes
Absolutely. 

 12:52
Charlie Van Derven
So that's a valid point for sure. All right, so we talk about the advantages. Peter, there's got to be some disadvantages. What's a disadvantage of making that jump from the broker dealer or the hybrid to an RIA? 

 13:05
Peter Hughes
Yeah, there's a few that you at least have to wait. You have to weigh it out. Right. You're not going to be able to do any commission sales. Maybe there's an occasional situation where you'd like to do that. This is probably the biggest one. You may lose some trails, some trail commissions, and there's ways to navigate your commission business over to the advisory side, but sometimes you can't, and sometimes you'll lose some revenue there. That's a big one. One that's kind of funny to me is I've had a lot of advisors say to me, but I'll lose my Series Seven, and I worked so hard for it, and all I tell them is, we have two years, so join us after a year. If you just really feel like you need that series seven you can reaffiliate with the broke. Nobody's ever done that right? 

 13:56
Peter Hughes
Yeah they're fine with letting it go. The last one this is important occasionally is if you make the move you probably will lose out on prior acts, eno coverage and so for most advisors that is not a big deal at all. Occasionally if you sold some products that aren't working so well that can be something to think about. 

 14:19
Charlie Van Derven
Yeah okay makes sense. I will tell you in the years of working in the industry I will say the months of having this podcast but having worked with Ras prior to starting this I have never had anybody tell me they regretted the change. Yeah the line is I wish I'd have done it sooner. 

 14:44
Peter Hughes
Absolutely. 

 14:46
Charlie Van Derven
Again I'll relate it to my world which is not as heavily regulated obviously as advisors are but same. I mean I worked for other companies for ten or twelve years in similar roles marketing, business development. As difficult as some of the times are in being independent I would never ever change it. The record is never has anybody regretted that decision that I've spoken to so right yeah pretty awesome. I want to I want to learn more about Lexora maybe it's an attractive landing place for some advisors and I don't know if there's more to talk about the golden rule principle but it's a wonderful principle that you build around. Tell me more about maybe service provided. What sets your RIA apart from some of the others that in the industry maybe prior personal experience or just what you see out there and being in the space. 

 15:52
Peter Hughes
Yeah I think that the service as far as the name Lexorum we do try to provide a really high level of service to our advisors and we try to work with advisors that we like. I mean, that's one of the things to be an advisor with us, you have to be somebody who doesn't rub us the wrong way. We've turned away advisors with fairly large books of business for that reason. We're trying to create a culture here where when I get a phone call and I see somebody's name on the phone, one of our advisors, I don't want it to be a negative reaction in my spirit. You know what I mean? I think we've done pretty well with that. That's how we want to keep it going as far as distinctives there's a lot of firms, there's a lot of RIA but I think some of the things that set us apart besides that relationship side is we do allow just some of the fundamentals we allow our advisors to use their own DBA names. 

 16:50
Peter Hughes
We write into our advisor agreement that the book of business belongs to the advisor and of course legally it belongs to the firm. But if an advisor leaves our company. We're not going to make it difficult for them to leave. We'll actually help you go, and we just give as you mentioned earlier, we give a lot of freedom and flexibility. If an advisor wants to manage accounts themselves, they can do that if they want to use our models. Because we have two CFAs on staff, they can use our models if they want to use third party managers. There's a lot of different business models that are being worked within Lexorum. 

 17:25
Charlie Van Derven
Yeah, and I'll tell you, my conversation with Gary spoke directly to that right. Where I believe most of it is managed by Luxorum, so it frees him up for more client time. He spoke to that type of flexibility and was really complimentary of the firm when he did. 

 17:45
Peter Hughes
Yeah. Well, Gary's a phenomenal advisor and one very thankful to have him, and we want ten more gary's very cool. 

 17:56
Charlie Van Derven
He's kind of his own mold. We might have trouble finding ten more Gary's, but that's true. When you're looking for advisors, obviously, I'll call it, in a general sense, likability doing things the right way on their side before they join you. 

 18:12
Peter Hughes
Right. 

 18:13
Charlie Van Derven
We don't want anybody that is compromising anything whatsoever. Are there other characteristics you're looking for an advisor? 

 18:21
Peter Hughes
Yeah, there's a few. To put a word on it, because I've tried to put a word on exactly what you're describing, I say low ego. I want people who are they know what they do well, they're going to stay in their lane. Low ego people is what I try to be myself, hopefully, but occasionally you get somebody we had a person who approached us who was an advisor, and then he mentioned that he also wants to start a hedge fund on the side. I'm like, great for him, but that's probably not the advisor we're looking for. Aside from that, we want advisors who are fiduciary minded, who just think that way. The other one is probably we generally, with rare exceptions, we want advisors who do have some experience. We're not in a position to train people, so you have to bring your own book of business and be prepared to build it on your own for the most part. 

 19:19
Charlie Van Derven
So, Peter, I want to do what we can. Luxorum sounds awesome and I travel a lot, so I will be in Kansas City at some point. Of course, love to sit down over a cup of coffee and get a little tour and meet the team . Let's educate if we can. I want to educate based on your experience. Right. If you can teach somebody a lesson in starting an RIA or joining an RIA, I got a few questions I like to ask all my guests. Peter, is there anything you did on this roadmap, right, that you look back and you gosh, I wish I'd have done that a little differently and bless you. If not, how awesome is that, right? 

 20:04
Peter Hughes
No, I didn't know what I was doing. My background in the business was actually on the research and portfolio management side of things and so not on the administrative. There was a lot of things that I could have done much better. Just I didn't understand what I was doing to a large degree. I'm not sure quite how to say that. There's a folder I keep just for fun at this point, but there's a folder I keep which is called how to Start an RIA, which is a bunch of articles that I had printed off when I first started. 

 20:41
Charlie Van Derven
That's awesome. 

 20:41
Peter Hughes
I think the flip side, if I can just go ahead and kind of. 

 20:45
Charlie Van Derven
Do it, because that was my next question. Yeah. What did you do well that really propelled you? 

 20:50
Peter Hughes
Yeah, two things. One is I did a good job of surrounding myself with experts or people who helped me a lot. A compliance consultant, an attorney, friends, a coach, somebody at our custodian who kind of guided that process. I leaned on them very heavily, leaned on my wife for a lot of things. The other thing, just kind of on a personal because it was a difficult thing for me to do personally, but I did do a good job of just kind of going after it. And I looked back. There was about the first hundred days when I started, there was not a day in there that I didn't work. I did some work every single day. I know I had a to do list with over 100 things on it at one point. I heard a quote from Steve Jobs, if I can share this, I think it was Steve Jobs, but somebody asked him, like, how do you start? 

 21:49
Peter Hughes
He said to Steve Jobs that he was trying to start a company, and Steve Jobs, like, stopped him right there. He says, you don't try to start a company, you start a company. That was helpful for me because I just had to go after it and kind of keep blinders on, not look at other options. 

 22:07
Charlie Van Derven
That's it. One of my favorite quotes is also a Steve Jobs quote, and you adhered to this, I don't hire smart people and tell them what to do. I'm sure I'm blowing this quote up. Right. I don't hire smart people and tell them what I do. I hire smart people so they can tell me what to do. Surrounding yourself with a coach who's been through it, people who had more knowledge on where you were headed, maybe, than you did at the time. I'll tell your answer to my first question speaks volumes about that ego thing you brought up, Peter. I can't imagine a lot of people are going to say, I don't know what the heck I was doing. I knew I want to start an RIA. I had some experience in this stuff, but it wasn't my background. I just went for it. Right. 

 22:55
Charlie Van Derven
You talk the talk but you also walk the walk and that's awesome. 

 23:00
Peter Hughes
Honestly. If you want. I'll just say that in some respects it was about the most terrifying thing I've ever done. It was very hard to step away from a paycheck, but I'm glad and it worked. 

 23:12
Charlie Van Derven
Here you are, man. Here you are. Sounds like I can chalk you up as to one of those people who is like, best decision I ever made. Happy I made this decision. I'm not going back. 

 23:23
Peter Hughes
I'm not sure. I think I might have to put marrying my wife has probably got to be number one in there. 

 23:29
Charlie Van Derven
Good call. So where's the firm headed? Where's Lexorm going? Sounds like you're still kind of in that recruiting mode where you're bringing the right like minded advisors on board. What else can you tell us? 

 23:44
Peter Hughes
Yeah, I thought about that. I've thought about this a lot and I tend to not put real strong numerical targets on goals. My goal is I like the culture we've created and I want to keep that culture. I want to grow as fast as we can while keeping the culture the same. That means I have to hire the right people and I have to get the right advisors. To the extent that we can keep going but we're not a company that's grown real fast. I mean it's been very incremental. I talked to a guy who has a firm about the same size as mine in terms of advisors and he said that he's going from 21 advisors to 29 in one quarter. We're not going to do that. It's going to be two or three or four a year probably and hopefully we get the right two or three or four. 

 24:37
Peter Hughes
We have to maintain the service level for the existing advisors. That's number one. 

 24:43
Charlie Van Derven
Yeah, you owe that to them for sure. That's wonderful. Listen, there's a lot of respect for the fact that you're not trying to scale this thing as quickly as possible. You're trying to do it in the right way. That's not to say you can't scale quickly and do it right, but culture being as the most important thing to you, that's respectable. I appreciate that. 

 25:01
Peter Hughes
If I can just add I think it's interesting. I think that one thing our advisors like is there's so much going on in the way of acquisition and mergers. That's just not where our firm is at. I get calls, cold calls all the time now from I got one this morning from a larger acquisition minded RIA trying to ask if were interested in selling out. I think that our advisors appreciate that is not on our radar screen and we're trying to build something for the long run here so that they don't have to worry too much about, is Lexorum going to be gone in two years? Because Peter's Tashed out. That's not on our about. 

 25:44
Charlie Van Derven
Yeah, that stability is awesome. Peter, I wouldn't ask you this question if you hadn't already agreed to it. Are you good being a resource to our listeners? If you got someone out there that wants to tap you for your experience, maybe Luxorum sounds like the right place for them. And it sounds like a wonderful environment. You're doing the right things to create a good company culture. How can someone reach out to you? 

 26:11
Peter Hughes
Yeah, they are welcome to. I have talked to an awfully lot of advisors about the questions we're talking about. So, yes, if somebody would just like some counsel, I'd certainly be happy to. You want me to give my contact information? 

 26:25
Charlie Van Derven
Yeah, whatever's best. Maybe LinkedIn or an email or whatever is the best way for you. What's the best way for someone to reach you? 

 26:33
Peter Hughes
Yeah, they can certainly email me. Our firm website is lexorum.com. Aur u M.Com, and my email is P. Hughes@lexorum.com. So feel free to call me. It doesn't mean I'm expecting you to join the company, but I have counseled a lot of people on this and I also should mention I have an extremely experienced vice president and chief compliance officer, who in some respects, he's more experienced at a lot of this than I am, who would also be a resource. 

 27:04
Charlie Van Derven
That's awesome. Peter Hughes, I'm really glad to know you. I'll have to thank Gary for the introduction because how do I say this and not alienate. Absolutely everybody listen. There's a purity to what you're doing. I love that you lead with culture, the golden rule principle behind the decisions you make. How cool is that? What a wonderful thing to wrap the culture of that business around. I think I just enjoy knowing you. I'm glad that we can we're new friends, we don't go way back or anything, but I'm excited to have you in that network and I expect we'll be talking a lot in the future. Thank you for joining me today on RA Collective. I love hearing your story, man. 

 27:56
Peter Hughes
Well, that's tremendous, Charlie. It's nice to have gotten to know you. The whole thing has been a blessing. Hard at times, but a blessing, and it's a blessing to be on the show, so thank you. 

 28:07
Charlie Van Derven
So, on behalf of myself, Charlie Van Derven and the crew here at RA Collective and my new friend Peter Hughes, thank you all for listening today. Time is the one thing you can't make more of. You spend some of it with us, we certainly appreciate that. Now, if you like what you heard from Peter, our other episodes, please go ahead and share or review our podcast. That's how we reach more listeners. So don't be afraid. To reach out to Peter if you got some questions about his firm or some of his advice in the industry. By all means, I'm an easy guy to find on LinkedIn, RIA Collective.com. I'm kind of all over the place. So, Peter, thank you again for joining me. For everybody else who tuned in, thank for spending some of your day with us. 

 28:46
Peter Hughes
Sounds good. Thank you.