Early into his career as a financial advisor, Eric R. Ervin says he was keen to observe how his biggest clients had built their wealth. And it quickly became clear to him, he says, that fortunes are made by building businesses, not through a paycheck.
That entrepreneurial spirit propelled Ervin to build a solid wealth management group with Morgan Stanley, but it still wasn't enough. He sought a new challenge, and it came via a client with a proposal: Would he be willing to give up his Morgan practice and comfortable lifestyle to launch an ETF provider? Ervin says he didn't take long to make a decision to leave the wirehouse and co-found San Diego, Calif.,-based ETF provider Reality Shares.
In December, Reality Shares launched an ETF seeking returns based on the growth of expected dividend values of large cap securities, a first for the U.S. ETF market, the firm claims. Speaking with Money Management Executive, Ervin recounts some of the challenges that he faced from the beginning of the venture and how he was able to overcome his self-doubts.
Where did this idea come from?
I was with Morgan Stanley in the mid-90s, as a young financial advisor. But I had a great mentor, and he said, Eric, I know you're going to do fine. But your goal shouldn't be to build a big book of clients. Your goal should be to become a client. I always thought about that. As a financial advisor you have this beautiful perch to just look out and see how all these people created significant wealth. None of them did it with a pay check. So I always had that in the back of my mind - learn from them, do what they do.
A couple of clients then came to me and they wanted to start an ETF shop. One of them was a very good friend of one of my clients. He was Mike Rosen and he had built Rochester Mutual Funds, the municipal bond firm. He had sold it to Oppenheimer and then came out to San Diego and started a convertible arbitrage hedge fund, grew that over a billion, and wanted to then get into the ETF business. But they really didn't have a concept. So they were coming to me at Morgan, asking for my help from a business standpoint. I had been noodling on this idea for ten years, and my clients were so frustrated with the market. I just wanted to do something purely based on the reality of how companies were doing.
At that point, you were itching to get out of wirehouses?
I was itching to see this concept come to life. To see the product hit the market; for 15 years, no one created it. So at that point, these two people had come to me with the idea to start an ETF business. I suggested to them how I would do it. So they said, "You have to quit your job, this is going to be a phenomenal idea, because we don't want to be fighting with Morgan Stanley over whose idea it was."
I had a phenomenal business at Morgan Stanley, with a really good income and book of clients. So that was a hard thing to turn away.
Can you explain your decision process? How did you weigh this?
We used to tease, for the first five years of your life, you're overworked and underpaid, and then for the rest of your life, you're underworked and overpaid. So I had arrived, everything was good to go, I could just about put it on autopilot and continue to gain new clients. But I still had that itch - that's not wealth creation, that's income creation. That's a comfortable lifestyle, but there's no $100 million check at the end of the rainbow. And there was also the challenge, I was ready to do something and complicate my life, to go into battle again and make it tough again. And boy I did it.
Fortunately they decided to seed the company. They said, we'll put in the first check but you have to go out and raise capital. You're the CEO, it's your company. We're here for you if you need us, but don't rely on us to write you checks, because it's not going to happen.
Were you ever in a management role of that scope before?
At Morgan they would lean on me quite a bit for the training program, so I was the mentor for all the new associates in the San Diego area. In any office I've ever been, I always gravitated to those kinds of responsibilities. Our team was head alternative investments coordinator for the region. So I was in that role, but it was a small staff. Also, I was always curious, and I was involved in every client's business in how they would grow and shrink their businesses. My advisor role was like an MBA, and I was essentially learning from all these great business people as to how they did it.
So what was your first step?
I had been in this cushy, Class A office space, and I really wanted it to be like the garage space startup, and I didn't want to blow all the money while we were in product development mode. So we opened up this tiny office suite, it was actually in an art studio. So there were all these art studios, under the airport flight path - literally you had to cover your coffee cup every time the airplanes would come overhead; otherwise the asbestos would trickle down into your drink. No air conditioning, no heating. It was awesome. I really wanted to start from scratch, so we could look back and say, "Yep, I put the Ikea furniture together in that first office," just so we would always know where we came from.
So then I hired a couple of analysts. In school I was in computer science, so I've always been kind of a geek. Because we had to build all these indexes, we ended up getting this big database and I had a SQL (database programming language) for Dummies handbook out so I could learn how to write the code in order to build this back-tested history. It was very hands on, sometimes to a fault.
It seems you were game for the challenge, but how did this test you?
So many times I've looked back and asked what was I thinking? But when I was at Morgan Stanley and had the nice business, if you had a sleepless night you'd wake up and watch TV. Now, I have those sleepless nights all the time, but I wake up, its 1 a.m. and I say, "I'm going to go into the office, because I need to work on this problem or solve this issue." I have no interest in wasting my time because I am so interested in doing this challenge, and overcoming it.
What was the first real difficulty that you had to deal with?
I'm a people person, so it was really hard when I had to let somebody go. It's better for them and it's better for you, but I think I have a tendency to hang on for a bit longer than normal and just keep trying because I really want everybody to succeed. This was one of the earlier employees. And now he's got a much better job in a much better environment. So it just wasn't the right fit, but I was trying to make it fit for too long.
What did you learn from that?
The main thing is to see that everything works out, even when it doesn't. So don't worry, just remind yourself of that, that this person is going to be ok, you're doing them a favor.
How did you set your mind toward building this product? It's a different skill set than wealth management.
I've always held the institutional space in high regard. When you're a retail financial advisor - and I was on the upper end of that spectrum, we had a very sophisticated practice - but still I always felt like the guys on the institutional side were something different, that they had this extra knowledge. Now having been on this side, having worked with them, you learn they're people just like you. I think I shouldn't know more than that institutional sales trader, and yet I have to teach him about how this works. He doesn't know this, he knows his business. So it was challenging at first to overcome the stigma in my head that I wasn't good enough, or that I shouldn't correct him, that maybe I was missing something. Eventually, I learned I just needed to correct them.
You had the product in mind, and it was just a process of assembling it?
Yes, I had thought about this product since 1999, when the market was going up every day, and you knew that there was some danger on the horizon, but you didn't dare get out of the market or short anything. There were long/short hedge funds going out of business because reality was off the charts. There was no reality. the market was just going up. It was just silliness, and that was where the genesis of the idea came from. So I was always developing that concept, never thinking I was actually going to build it, but knowing this is what I wanted for my clients, asking if this could be structured for my clients, and knowing there was this institutional marketplace where people were trading this.
When I left to start the company, it became a matter of getting an index licensing agreement with S&P, and needing the market makers to trade this as tightly as possible, because you couldn't just put $5 million on this investment; if you had $500 million, no problem. So how do you convince them as you grow from zero to $500 million that they need to do these things for you? And also, how do you convince them that you are going to grow to $500 million? How do you convince the S&P that you're worthy of a phone call? That was a big issue, overcoming the stigma of not wanting to deal with small timers. That was one of the biggest challenges of the development phase - yes we're going to be big, yes we have credibility behind us, look at all the capital that we've raised, with real substantive people. So it was putting that story together, so that anyone we talked to would understand and believe us.
How did you reconcile going from your position at Morgan Stanley to being an unknown, knocking on doors and pitching your idea?
Part of it was getting the audience. One you had the audience, you were ok. Even with the SEC, everything was going via paper. If you could just get me on the phone with these people, then we could explain some of these things. It's not, "I want this," it's more like, "You want this, we want this, there's some overlap, let's find that." And you can't find that overlap if you are always doing something with a first impression. So that was the benefit of a Morgan Stanley. You could get past that first impression, and now you can have a dialogue. "Reality Shares, this tiny little company in San Diego, you don't have that." So it's a matter of how you pitch your way in so you can have a dialogue.
We got that dialogue with just tenacity and perseverance; those were big things and still are. I continually harp on this to our employees - we are not a large New York investment bank. And people know that. So we have to seem more credible and more amazing, because we have to overcome that stigma.