How Unified Managed Household Was Born with Len Reinhart

Jack Sharry: Hello everyone and welcome to WealthTech on Deck. This week’s episode is extra special, featuring a guest who has profoundly influenced the advisory business. I’m thrilled to introduce my friend and colleague, Len Reinhart. Len’s contributions have propelled the advisory industry forward in an unprecedented pace and way. Today, RIAs collectively manage over $145 trillion in assets, according to the SEC and the Investment Advisor Association. Len stands out as a true pioneer in wealth management and financial technology, boasting more than 40 years of experience advancing fee-based advisory models and managed account platforms. As the founder of Lockwood Advisors, one of the first turnkey asset management platforms, TAMPS, as we called them back in the day, Len played a pivotal role in mainstreaming fee-based advisory services. His leadership at Lockwood and later at Pershing helped establish managed account solutions for both broker dealers and RIAs. Today we’re gonna catch up with Len and talk about the industry’s first big wave of innovation, the Unified Managed Household, UMH, that’s been what so many people are talking about and many people are now working on. We’re gonna talk about that, because I believe it was his idea or at least the colleagues he worked with at Lockwood way back when and probably before that at EF Hutton and Smith Barney, we’ll talk about all that. So Len and his colleagues at Lockwood wrote the first white paper on UMH in 2010, we’ll talk about that. And he and I are gonna take a trip down memory lane on how the idea of the UMH got started, what the history looked like for his front row seat. Now that he is retired but still close to the business, three of his kids are still active in the advisory world, we wanna get his assessment on what’s been going on and where things may be headed. So Len, welcome back to WealthTech on Deck, great to have you here.

Len Reinhart: Well, thank you, Jack. It’s great to be here.

Jack Sharry: Yeah, yeah, it’s gonna be fun. So, let’s start with you telling us about how you got started in the business, because I think that story is instructive. We have a lot of folks that are newer to the business listening in. This is real history in the making. So, Len, talk about how you got started, and then we’ll talk about that career trajectory over the next few minutes.

Len Reinhart: Well, I started with EF Hutton. When EF Hutton talks, people listen. t\The old people on this podcast will remember that. It was the second largest broker dealer, second behind Merrill Lynch way back. I started in 1978 in a little group that consulted two big pension plans back when defined benefit pension plans were what existed for pension, that and Social Security. And so we helped large plans with their asset allocation, manager selection, things like that. And my boss at the time, guy named Jim Lockwood, who was a stockbroker by trade, and he was a million dollar producer back in the 60s, which was unbelievable in today’s terminology, but he had said numerous times that the best advice he ever gave a client was telling them not to sell. And he didn’t get paid to do that. We’ll go back, in 1974, they allowed commissions to be negotiated and Jim Lockwood had the concept, well, if you can negotiate commissions, let’s negotiate them to zero and just charge a fee. And that was the beginning of the fee-based business. We opened up a small little program, believe it or not, $25,000 accounts would be managed in individual securities, about 20 of them. And we charged a 3% fee for both management fee and all commissions. And that sounds outrageous fee, but in actuality with what commission rates were at the time, it was a very reasonable fee. And keep in mind back at that point, brokers were selling 7% loaded mutual funds. So, you know, life has changed. The business has changed dramatically since then, but… So the beginning of my career was really about building these programs, these retail fee based programs that grew and grew and grew. And we were taken over numerous times, EF Hutton, I had many bosses, the last of which was at Smith Barney working for Jamie Dimon. But all through that time, one thing always bothered me and that was the fact that we had an investment objective questionnaire. But if there were 12 questions, 10 of them were asking the client, how much risk do you want to take? And so we’d ask those questions and then we’d give them exactly that amount of pain. We’d come up with just what their risk tolerance was, and we’d come up with a strategy to give them that amount of risk. And what always bothered me is that really wasn’t an investment objective questionnaire. It was a risk questionnaire. And we weren’t really solving the people’s investment problems. We were just determining how much risk they could handle and then giving them that much risk. And so really the evolution to a unified managed account household was the fact that we changed the way we started to do investment objectives. And so about that time, this was bugging me and I left and I started Lockwood. And the big part of Lockwood was technology and the technology was something that’s become very common today was asking the client, why were they saving the money? What were they trying to accomplish? And trying to determine that dollar figure. Then looking at how much money they had and their savings rate and telling them, were they going to make it or not. You know, and what was their probability of making it?

Jack Sharry: So Len, one of the things, both of us were around way back when, back in the day. One of the things that always impressed me, I found it just exciting, was how innovative, thoughtful, smart. Now they did some dumb stuff too, as you know, but for another day. But they did an awful lot of smart stuff, like starting fee based. They started universal life, for those of you who know anything about life insurance. They were very creative. Talk about what, as we get into what you did with Smith Barney then onto Lockwood, I think it bears repeating just what a juggernaut EF Hutton was at being creative. Talk a little bit about that if you would.

Len Reinhart: Yeah, EF Hutton, as I said, was the second largest brokerage firm. And Merrill Lynch was, in that time, seemed like a bunch of, they were like the army. There were rules, regulations, and everything had a funnel up through the middle. EF Hutton was like seven different companies that each one did their own thing. And then we rolled up together. And so they were the first to do universal life. They were the first to do managed money, fee-based managed money. They were the first to do oil tax shelters. They got into the movie business, financing movies and films. It was a fascinating place, but their strength also became their weakness. You know, and you had seven entities that were basically doing their own thing, competing for the attention of the brokerage force that they had. And so it was a bunch of fiefdoms and I experienced a lot of things like senior executives throwing punches at each other in meetings…

Jack Sharry: It was a very different area.

Len Reinhart: Everybody was out for their area and protecting their area. And what I learned in that experience was managed money, fee-based managed money really was difficult to do within a brokerage firm where everything was commission driven. And so it took a long time to get fee based managed money off the ground.

Jack Sharry: Talk a little bit about that, because I think for lot of our listeners who weren’t even born then, I just remember that shift from transactional, stock bond, commission-oriented business, stock brokers were doing it. And Hutton, you and your colleagues figured out how to convert that from a transactional mindset to a fee based. Talk a little bit about how you made that happen, because that was critical. The business wouldn’t be where it is today had you not figured that out.

Len Reinhart: Yeah. And the way we did it was we’d go to a branch and find a young producer and who was struggling with the transaction based business. And we teach them about doing those investment objectives and coming up with an asset strategy and we’d help them do it. And this was when modern portfolio theory was modern. And we’d talk about the efficient frontier. If they bought into it, they’d start doing the business. And then what would happen in the branch is the other bigger older brokers would see this kid and all of sudden after a couple of years, they’d go, wow, this kid doesn’t even come into the office that much. He’s always out visiting clients and he’s blue chipping in March. What blue chipping meant was they were qualifying for trips at certain different production levels. And they were qualifying early because we build quarterly in advance. So all of a sudden in January, they’d get a big hit of income, revenues coming in. And these other brokers would look at them and go, wow, wow, they’re doing that. And all of sudden they’d start talking to the young person and saying, how do you do that? And it would spread. And so what happened was certain branches became huge fee-based producers. And then other branches would look at that and say, how are you doing that? And so it was really, I hate to say it, but it was greed motivated.

Jack Sharry: Yeah, well I remember because I used to call on some of the big branches of EF Hutton way back when in my early days in my career and there were a number of branch managers who were kingpins for their particular branch of that region and they competed like crazy and they caught on and they got their people, especially the younger folks, because I used to do seminars with lot of those younger folks. They were such a real marketing juggernaut, is my recollection on Hutton back in the day. And then they did fee based, they did annuities, they did life insurance, they did the tax shelters, lots of tax shelters, and they did a lot of seminars. I mean, so they were outgrowing the business, true?

Len Reinhart: Yep, exactly. We converted people and they became our voice. And they had the time to do that because they weren’t sitting there pushing trades through to their clients and having to talk to them. They just talked quarterly about the performance and the asset allocation, things like that. So it became a much better way to do the business. And then what the management realized of the firms we worked for was there were no lawsuits. In the entire time at the brokerage firm where every other area with lawsuits, that’s a budget item in doing business. We had zero because we’re giving the client what they asked for. And it was diversified. It wasn’t one stock. We were giving them 30, 40, 60 stocks. So it became a very profitable, very key business for the different people who acquired EF Hutton and on through American Express, Shearson, went on and on and on. I had six different bosses in nine years as it went through. And as I said, we ended up at Smith Barney working for Jamie Dimon. He looked at our business and thought it was fascinating. One thing I always heard every time we got acquired, somebody would look at our business and say, okay, we’re going to double your budget. It’s fantastic. What do you think you can do next year? I said, next year’s already done. You’re going to double our budget, you’ve got to look out two to three years because that’s how long it takes to convince brokers to do this and to make that change. So that’s, you know, one thing that I think it’s bothered me over my years in this business was how slow change happens in the financial services industry. There’s a lot of stuff going on with different types of investments and stuff, but the way to do business changes very slowly.

Jack Sharry: Yeah, so let’s talk about that because that gets us to UMH, which is where we’re going to spend the bulk of our time. And for our audience, I’ll spare you the Hutton through Smith Barney to Lockwood piece. Lots of name changes. Len had lots of bosses. They were the they were the biggest and the bestest at managed money from the get go. That’s what’s called the consulting group. Ultimately, still part of Morgan Stanley, still the biggest and the best in terms of what they do. That that’s that piece for another podcast for another day. But I want to get to, when you went to Lockwood, it was you and Jim Seifert sitting on a couple of boxes, I think is where you guys started on a couple of doors that were made into tables. You started Lockwood, the two of you, like, what did we do? So talk about that and how that went, because that became a juggernaut. It took a while. It was not easy. Talk us through that, because that sort of sets up as part of that, you came up with the concept of the UMH. So take us through that evolution.

Len Reinhart: We were basically your typical startup. You’re right. We were in the basement of the building on folding tables and stuff. And, we were focused on the technology because the point of doing Lockwood was going to change the way we help the client when that was going back to establishing true investment objectives. How much money are you going to need to accomplish your life dream? And we focused on that and we built technology to do that, that we really didn’t talk about investing ‘til the end of the process. And what we found out was clients engaged with that. You know, when you talk to a client, a typical broker back then would talk to a client and they’re talking about different stocks and this and that. I’d sat in those meetings and you could just see the client’s eyes glaze over. You know, it was all this technical mumbo jumbo, it was the broker trying to show the client how smart they were. Instead, what our technology did is guided the advisor down a path of, okay, Mr. and Mrs. Client, what are your goals? When do you want to retire? How much do you want to spend a year? Do you want to leave money for your kids? Do you want to give money to different charities? All those types of questions and people got into that, because they could understand it. The biggest question you ever got from a client that went through a process is are we going to make it? Are we going to end up having to live in our kid’s basement? And that’s what we’d help them with. And a lot of times their aspirations were much bigger than their means. And you know, you had to talk them down to something reasonable. So it wasn’t just what they wanted and, oh, that’s what we’re going to give you now because we checked the probability and say, gee Jack, only have a 30% chance of making it.

Jack Sharry: Two things, I think you guys coined the term goals based investing or goals based wealth management. And then just talk about how you showed the probability of success. That’s another sort of key turning point in the kind of conversation you’re describing.

Len Reinhart: Well, we would gather all the information and then what the technology did that we built, it would come to a total amount of money they’d need at a certain time in the future, which was really, you know, retirement day. Where their big earnings period would be over. And then it took the money from that point forward, given how we thought they’d spend the money and using some conservative consumptions in the end. Capital markets, it would show them basically when and if they were going to run out of money. And then, you know, it gets complicated because you’ve got to factor in Social Security. You’ve got to figure out, you know, factor in if they had a defined benefit plan, if there were going to be inheritances they’d receive. So it, the more information we have, the more accurate would be the predictions and the probability of success.

Jack Sharry: Didn’t you also… you were among the first to really promote financial planning as part of the exercise that was really…

Len Reinhart: Yeah, there was financial planning software back there, but it was more about selling big estate planning life insurance programs. What we were doing was more rudimentary sort of financial planning, talking about your bills, everything else. If you wanted a second home, what that was going to do to your probability of achieving your end goal, retirement goals. So it sort of took, stole from financial planning a lot of things, but then turned the financial plan into a projection of probability of success. And that’s what the financial planning software at that time didn’t do. It told you how to get around paying taxes and stuff like that and buying the appropriate amount of insurance, but it didn’t tell you the probability of success. So the probability of success is what the key element was. And now there’s a lot of software that does that. A lot of the financing planning software does that now.

Jack Sharry: So along the way, I think it was… when did you start Lockwood? What year was that?

Len Reinhart: 1996.

Jack Sharry: And so it was I think 2010 when you wrote the UMH paper, talk about that.

Len Reinhart: We didn’t actually write it in 2010. I wrote it in 2000 and called it Managed Account Odyssey 2010. It was a projection of where we thought the industry would be in 2010. And the culmination of that was a UMH.

Jack Sharry: And how did you come up with that idea? I can guess, and I know the story, but share that with our audience.

Len Reinhart: Well, it’s sort of evolutionary. When we started Lockwood, we had two angel investors, both of them billionaires, very successful. One was, who’s passed away, I can talk about, he was the chairman of Heinz Corporation, called Tony O’Reilly. He was a fascinating individual. But one thing I saw when dealing with both of them was they had an army of people, tax accountants, lawyers who managed all their personal expenses and investments to make sure they were avoiding as much tax as they could possibly avoid. And both of those who had told me the biggest… single biggest hurdle they have in investing is taxes. And, you know, as an industry, we wouldn’t really do much. We saw people muni bonds, but there was not a lot of impact on taxes. And then the other thing that I looked at we’re building Lockwood, our specialty was using money managers that knew, had a better idea of how to run after tax money. And when I went out to some very wealthy advisors, really the jet rich type of people. And again, they had the lawyers, they had accountants, they’re looking at everything and how to put it together and where to put certain investments. It wasn’t in tax free accounts, wasn’t in taxable. And we said, okay, Lockwood’s clients weren’t the jet rich people. They were, I guess you’d consider them at the time, mass affluent, clients between 500,000 and $5 million. Well, they can’t afford full-time people to do that for them. So, the UMH really became what we saw and what I was projecting when we wrote that paper was we need to find a way to provide similar services to the mass affluent as the jet rich people were getting. How do you do that? And that was going to be delivered through technology. And we started to build that through EMAT. I don’t know if you remember that.

Jack Sharry: I do. Electronic managed account technology.

Len Reinhart: That was a joint venture with Jay Whipple, who was the founder of Security APL. And we started to build that and we eventually merged Lockwood and EMAT together. And that’s when a lot of people were looking at what we’re doing and got interested in. We had a couple of the big banks who wanted to buy us and we eventually sold the Bank of New York.

Jack Sharry: I should interject here that you and I met when you were pitching me EMAT.

Len Reinhart: Yes.

Jack Sharry: The first time we met, you guys were just getting… I think you had merged at that point with EMAT and Lockwood, whatever year that was. And I was at Phoenix Investment Partners, now Virtus Investment Partners. And basically we had a big managed account business and you had the technology to try to pull it together. A lot of us talked about how you put it all together. We all kind of gave up. Not gave up, but we couldn’t figure out how to really make it work. We knew how smart UMH would be or could be, but making it work is hard, right?

Len Reinhart: Yeah. And we learned that.

Jack Sharry: Yeah, the hard way.

Len Reinhart: We were building it as we went and we got good at things like tax loss harvesting and we were starting to get into where to put the assets.

Jack Sharry: What year is this as you’re talking about that?

Len Reinhart: That was really then we’re about at 2000 when we wrote that paper.

Jack Sharry: Right, 25 years ago.

Len Reinhart: Yeah. And that was the idea. We could see where we thought the industry should go. We were not there yet. We were getting there, but we weren’t there. And so, you know, we wrote that paper and, now we, then we were part of, we sold to Bank of New York, part of a big company and dealing with Pershing. And that worked fantastically for us and for them. But it slowed down the progress. I mean, the one thing, you know, I think I’ve learned through all the years I’ve been doing this, big companies are great. But in a fast changing business where you need technology, it really takes an entrepreneurial smaller company to force that change.

Jack Sharry: Let’s talk about that because here we are. In my case, we’re that smaller entrepreneurial company. You have been a supporter and investor in LifeYield because you got it way back when. Going on its 17th year and we were purchased by SEI. One of the things I’m seeing that’s different now, the big back office providers are all scrambling to figure it out like for real, spending real money. It’s SEI for sure. They’re going to be delivering UMH this year, later this year. So for real, it’s happening. So talk about that as you went along, you kept trying to do it. A lot of people, I kept trying to do it. It took a long time to get the sucker going. Why did it take so long? And what do you think about where we find ourselves today?

Len Reinhart: Why it takes so long is, you know, there’s regulations, there’s fear from advisors, getting them over the hump of turning to this technology to do things. And so it just, it takes change. One thing with this whole concept, when we had Lockwood and then as I invested in LifeYield, I invested in two other smaller companies. Because I found out that’s part of my career I liked the most was working with when things were small and being innovative. But what you realized in there was you’re also at the other end of this was the advisor talking to the client. And so you saw these big advisors and we’d come in and say, this is the UMH and this is the way you should do your financial planning and all that great stuff. And they’d go to me, Len, yeah, this is great. But I’m the same age you are. I’m not going to change the way I do business now. I’m just looking at figuring out how to get the highest valuation to sell my business. So the one thing we realized, and I think why change takes so long in this business is that end advisor, you have to catch them at the right time. And to go back to our comments about the very beginnings of managed money, we didn’t do it with the biggest producers. We did it with the wannabe producers and we helped them become big producers. And this is the same process, Wealthcare, another company I invested in. We made them stay, they were now doing the whole technology front end and starting to do the backend and they started going after big producers and it was the same thing. They weren’t going to change the way they’re doing business. And the key advisor there was the younger advisor who happened to be one of my sons who bought into what we were doing. And he started building his practice. And they said, can you go out and find other advisors? Well, he didn’t find any big advisors. He found all the advisors like him, the wannabe advisors. And over a period of 10 years, he brought in like 300 advisors. And same process, very slow. And then all of a sudden, those producers start to become big producers, which influences smaller producers. And it takes on a life of its own. But that startup process takes a long time.

Jack Sharry: Tell me about it. We lived through it, because for our audience’s listening pleasure, I would give Len a call regularly, at least every month or two, just to check in and make sure I wasn’t going crazy as we were trying to push the rock up the hill to try to make UMH real, which we ultimately have succeeded. And just to amend my earlier comment, actually UMH is available today from SEI LifeYield. And it’s going to be even more available as the year goes on. So it’s not that it’s not available today. It is. There are many firms using what we’ve built. And Len was there to coach and coax and encourage, as anyone who’s done a startup knows, it ain’t easy. But as you look now, and clearly everyone I talked to, as you know, I talk to lots of people around the industry. The conversation is UMH. That’s what’s being built. A lot of firms frankly struggle. They know they need to build it and they see how hard it is. But as you’re seeing this, it looks to me like it’s really starting to turn, it’s getting very real. What’s your assessment? You had a big hand in making this happen. What’s your assessment as you watch it unfold and where do see things going in the near term?

Len Reinhart: Well, I think firms who don’t do it quickly are going to lose. AI is coming on. AI can take this technology and impact the advisor dramatically. And I think for an advisor to have the value added, they need to have, to retain the client, they’ve got to be doing UMH. If they don’t, they’re going to lose the client.

Jack Sharry: Yeah. One thing I want to underscore here, because there are a number of people that figure, AI will take care of this. Keep in mind, AI has to be on top of the wherewithal technology capability that is built. And for a lot of people, that’s not built. So AI can’t tell you what to do if it isn’t on top of something. And one of the examples I was talking to a consulting firm, one of the big names, he gets questions all the time about what to do on AI to get to UMH and his answer is you got to do UMH and then you can do AI on top of it. You got to get it done first. And so it’s heartening to see that the world is going this way. In fact, we’re spending a lot of our podcast time now and through years that you’re just talking about because there’s lots of different angles and lots of people are learning and that’s how we all learn. And just to acknowledge Len in this regard. We would not be talking about this today if it weren’t for him. So my hat’s off to you, and so is my family, by the way, for all you’ve done in that regard. Where do you see things going? How do you see things playing out?

Len Reinhart: I think UMH is going to be the future. And I think that package of goal, you know, true goals based investing and probabilities of success and other products that can be built around that. And I think this time it will change faster. And I think AI is the gasoline on the fire. And I think that’s what firms who don’t adapt quickly now. In the past, you didn’t have to adapt quickly and you’d still be fine. You just saw the other week, somebody wrote an article about AI and the impact on financial services. You saw Schwab, all these stock… Now, it’s not going to be that quick, but it’s not gonna be the 20 year time cycles that we’ve experienced in the past. It’s gonna be much quicker. And I think firms gotta react and be ready much faster than they used to be.

Jack Sharry: And just for those of you who are kind of wondering what happened there. The thing we’ve observed as we watch these things, Altruist basically did a deal with Holistiplan, which is a financial planning tool that basically make some simple recommendations around saving on taxes. You can feed the information from your tax return and it makes recommendations. It’s not comprehensive by any means. It’s a very good thing, but it was sort of misunderstood in my estimation by the market. But it sort of points out that unless you’re working at what is fundamentally going to improve outcome, which is the UMH, you’re going to be in trouble. You don’t have a choice. Holistiplan is a, it’s sort of like you know, it’s a pea shooter in a war. No knock on Holistiplan, it’s fine. It just doesn’t go very far. And UMH is complicated and it goes very far in terms of improving outcomes. You know, because we worked on this together. EY did an analysis of our, LifeYield’s methodology and it improves outcomes by a third. Where else do you go to improve outcomes by a third? So that all said, let me draw this to a close. It’s been fun to walk down memory lane to talk about all this. Len, slast question before we head out. You’ve got some time on your hand and you and I still stay very much in touch. One of our favorite questions always at this point of our podcast is what do you do these days, I was going to say outside of work, but you live outside of work these days, that you’re passionate about or you might surprise our listeners. You’ve told me a few things you got cooking, but what are you up to these days?

Len Reinhart: I think the biggest thing is I spent my career in a very intangible business. I remember I took my daughter when she was like six or seven years old to one of those, bring your kid to work. And, you know, we were sitting there and she’s looking around, she goes, Dad, what do you do? And I tried to explain it. I help people make money. And she walked away and she had some stuff, coloring book and stuff like that she could do while I was working. And she came back in and said, hey, I can help people make money too. And she was drawing dollar bills and cutting them out.

Jack Sharry: That’s great. By the way, Sarah is a marketer for MMI. So she’s very much in our business.

Len Reinhart: Yeah. That intangibility over the years, my passion sort of became or my hobby became building things, you know, furniture and like dining room tables and things like that, that you had immediate satisfaction. You built it and it was there and it was used. So I did that. My crowning achievement was, I’m up here in the Pocono Mountains, so we have a lot of property, I built a cabin on top of a mountain. And did it from cutting down the trees, I had a little sawmill, putting it through a sawmill and building the thing. Took me two years. It’s completely off grid, but I did it. That was sort of my crowning achievement of building stuff.

Jack Sharry: Love it.

Len Reinhart: I like to do things that have tangible results.

Jack Sharry: Yep, well, as a beneficiary of your work, your life’s work, career work, I’ve experienced the tangibility of your efforts, so I appreciate it very much. Also appreciate your friendship, which speaks for itself. You’re just a great, great person. So thanks for all that. So Len, thanks for this conversation as always, I learn something every time I talk to you.

Len Reinhart: It was a pleasure talking to you, Jack.

Jack Sharry: My pleasure. If you’ve enjoyed the podcast, please rate, review, subscribe, and spread the word about WealthTech on Deck. You’ll find us wherever you listen to podcasts. Visit our website, wealthtechondeck.com for all episodes, blogs and curated industry content. Len, once again, thanks so much. Real pleasure, really enjoyed it.

Len Reinhart: It was great. Thank you.