INDEPENDENT TOGETHER

Felipe Luna is on the Prowl for More Advisors particularly wirehouse reps who are lusting after the independent life for his RIA firm, San Jose, Calif.-based Concert Wealth Management. In October, Concert brought on three Morgan Stanley reps with about $150 million in client assets (the group is working on bringing over the remaining $150 million in client assets still at Morgan Stanley). Luna's proposition

Felipe Luna is on the Prowl for More Advisors — particularly wirehouse reps who are lusting after the independent life — for his RIA firm, San Jose, Calif.-based Concert Wealth Management. In October, Concert brought on three Morgan Stanley reps with about $150 million in client assets (the group is working on bringing over the remaining $150 million in client assets still at Morgan Stanley). Luna's proposition to them: “Join us and we'll take care of the rest. Literally.” Luna offered David Mraz, Bill Amerine and Dan Hirschler a chance to run their own RIA operation inside of Concert without the hassles of running a business. Essentially, Concert is renting out its platform to Mraz, Amerine, Hirschler & Associates, and providing them with the works:back-office and operational support, legal assistance, human resources, compliance, technology and software licensing. In addition, the firm provides them with phones, email, internet service, client relationship-management systems, performance reporting and E&O insurance.

The RIA industry's rapid growth is no big secret. Total assets in the RIA channel hit $2.1 trillion in 2006, up 62 percent since 2001. Further, today's roughly 16,000 RIAs are expected to grow 19 percent to about 19,000 by 2012, according to Moss Adams, a Seattle-based consulting firm specializing in the financial-services industry. To maintain the pace of that growth, investment advisor reps (advisors affiliated with an RIA) across the country are coming up with some innovative strategies. One of these is the “plug and play” RIA model. Much like Concert, that model supports advisors new to the RIA model, alleviating the burdens of running a small business. Barnaby Grist, managing director of strategic business development at Schwab Institutional, says, “This is the very beginning of a very big trend. A significant percentage of new RIAs will choose to go this way.” He predicts that over the next three years, a quarter of all advisors who start their own RIA will piggyback off an already existing RIA that's willing to provide all of the back-office services that their wirehouse or independent broker/dealer firms used to provide.

RIA Incubators

Instead of leaving them to figure out how to set up the office phone and network systems, this so-called “incubator model” allows Mraz and his partners to jump right into serving their clients. That's good news for Mraz, who says his initial hesitation about going independent was related to running a business: “Our strengths are managing money and managing client relationships. That's what we do well. I thought if I started my own business I wouldn't be able to focus on that.”

Of course, such services come with a cost. Concert receives somewhere between 15 and 30 percent of Mraz's annual revenue. (Luna says that's the only financial arrangement the two groups have.) “They're just affiliates of Concert Wealth Management; we have no equity interest in their firm,” Luna says. Not a bad setup considering the average annual expenses for an RIA are about 35 percent, according to industry consultants.

Luna has little doubt that the “RIA-in-a-box” model will attract plenty of wirehouse reps who may have previously balked at the idea of going completely independent, fearing they were unprepared to run their own businesses. In fact, Luna says breakaway brokers will play a major part in his firm's growth plan over the next five to 10 years. The ideal rep, he says, is a fee-based manager with $100 million to $500 million in (primarily discretionary) assets, who generates $1 million or more in annual revenue.

Getting those reps may come easier to Luna than to other RIA principals in search of wirehouse talent. Luna is a former wirehouse producer and branch office manager at Smith Barney and UBS who used to recruit reps away from competing firms. “I used to manage the process of bringing over reps from other wirehouses,” he says.

That said, the model is catching on with other RIA firms that want to extend their reach beyond one or two offices. Beacon Pointe Advisors of Newport Beach, Calif., is ready to make its first incubator-model deal. Like Concert, Beacon Pointe says it's willing to expand via wirehouse advisors or existing RIAs. Shannon Eusey, president and chief operating officer at the firm, intends to offer the firm's services — “manager of managers, asset allocation and ongoing due diligence” — across the country.

And while two-thirds of the firm's $4.5 billion in assets are on the institutional side, Matt Cooper, the firm's managing director, says Beacon Pointe is focusing its energy on raising retail assets. Eusey says the firm's private retail side of the business is the fastest growing in terms of assets and clients and, therefore, needs additional private wealth-management advisors. “Reps don't want to deal with the SEC, pay for the phones, technology and maintenance of a small business. They just want to advise clients. We are giving them the opportunity to step out of the wirehouse and be fully served by us in Newport Beach, California,” Cooper adds.

But getting that wirehouse talent and rolling it into an existing RIA platform is not for everyone. “Only a small number of RIAs can actually do this to the full extent. The typical $100-million RIA is not going to have the infrastructure to scale up this way,” says Grist. Also, the owners of the existing RIA should be willing to let the new firm operate the way it wants. For example, the new RIA may have a different investment philosophy and pursue investing strategies unfamiliar to the “host” RIA.

Also, investment advisors would be wise to remember that wirehouses don't usually let their big producers leave without a fight. Brokers jumping ship risk being faced with temporary restraining orders, courtesy of their former employers. These legal motions keep departing reps from contacting clients. One way to get around this hurdle: the Broker Protocol. This informal document attempts to set a standard for reps switching firms. If followed, the Protocol provides reps with a clean, TRO-free exit. Not surprisingly, Luna, the former branch office manager, made sure his RIA was signed onto the Protocol. Beacon Pointe says it's looking into signing on as well.

The Merger Route

Not all RIAs search for their talent on Wall Street. In fact, most merger-and-acquisition deals happen among the firms themselves. Dave Devoe, director of Mergers and Acquisitions at Schwab Institutional, says 2007 was another record-breaking year for deals, the third in three years, with about 60 mergers and acquisitions. At the end of 2007, more than $70 billion in client assets had been acquired. The buyers in these deals include holding companies, RIAs and banks. However, the second biggest buyer category in 2007 was RIAs buying other RIAs.

Within just the last five months, the RIA industry saw two major deals: In January, Phoenix-based Inlign Wealth Management was acquired by GenSpring Family Offices. Mark Feldman, the CEO of Inlign, says although his firm is only 3 years old, it's growing at a rapid pace ($2 billion in assets, up 25 percent since January 2007), and needs a way to continue serving clients efficiently while maintaining this growth. Feldman says, “We were fighting the growth curve, and needed to figure out how to get to the next step and serve more clients. We hit $2 billion [in assets] and said, ‘That's incredible. But how will we continue to serve sophisticated clients?’” The answer: scale. GenSpring has 12 offices across the country offering wealth management services to over 600 families. With about $15 billion in assets under management, GenSpring says its sheer size will be beneficial for Inlign's growing client and asset base.

Feldman says training an employee, for example, about the tax impacts of owning an airplane is one thing, but, as an affiliate of GenSpring, he now has access to 10 people across the firm's network who can help. “Our clients won't get anything too different than they used to, but they will get better ideas to work from,” he adds.

Perhaps the biggest merger in RIA-land recently came when two major RIAs, San Francisco-based Kochis Fitz and Los Angeles-based multi-family office Quintile Wealth Management, merged outright to create the tenth-largest RIA in the country, with $5 billion in client assets. Prior to the merger, Kochis Fitz and Quintile ranked numbers 43 and 66 on Registered Rep.'s “Top 100 RIA list.”

Together the two firms serve approximately 385 individuals and families through a team of 68 employees whose credentials include advanced degrees in law, economics, accounting and business, as well as professional designations in financial planning and investments. “We believe that this large equity pool will enable us to finance our long-term growth as an independent firm without the need for third-party capital — now or in the future,” says Tim Kochis, co-founder and CEO of Kochis Fitz.

A Yellow Brick Road (Sort Of)

For all the growth in assets, clients and advisors, the RIA channel still faces some major challenges. While mergers and acquisitions deals have hit record levels, finding the right talent is not as easy as it may sound. For one, the recruiting war is an industry-wide fight and firms, including wirehouses, are doing whatever they can to get the right people. In some cases, wirehouses are shelling out upfront bonuses of over 200 percent of trailing 12-month production (for the right rep with the right book, of course). Meanwhile, independent b/ds have also started offering sign-on bonuses to valuable, incoming reps — though the deals are not nearly as generous and usually max out at about 20 percent of trailing 12.

The talent shortage coupled with an increased demand for financial services creates a seller's market for labor, and advisory firms are feeling the pressure, according to the 2007 Moss Adams Compensation and Staffing Study. Compensation levels, particularly for experienced professionals, are on the rise. In 2006, median compensation for lead advisors was $150,000, up 41 percent from the previous year. And owners of firms with greater than $5 million in annual revenue earned pre-tax income that topped $1.1 million. Further, according to the study, compensation and benefits are by far the most significant expenditure for any advisory firm, accounting for, on average, nearly 75 percent of a firm's expenses.

But no matter what the cost, Philip Palaveev, a consultant with Moss Adams, says firms need to have enough people on board to maintain growth. He says 50 percent of the RIA industry's growth over the last five to six years came in 2004. “People were ready to put their money back in the market. The fastest growing firms grew 60 to 70 percent that year,” he says. Those firms with stagnant growth didn't have the capacity for it. They were so stretched, Palaveev says, that “they didn't have enough people to answer the door when clients knocked.”

RIA Database Top Regional RIA Definitions & Methodology

75 percent of all RIA assets are concentrated in just 30 percent of the country: Calif., Colo., Conn., Fla., Ill., N.J., N.Y., Ga., Mass., Mich., Ohio, Pa., Texas, Va., Wash. RIA Database's Top Regional Report ranked registered investment advisors (RIAs) in these states based on assets under management, as defined by the Security and Exchange Commission, as of December 31, 2007. Firms were included based on the following criteria:

  1. Greater than $500 million in assets under management;

  2. Greater than 50 percent of their business must serve the retail marketplace; and

  3. They must provide financial planning, portfolio management, or due diligence on external advisors.

Firms were excluded if they were registered broker/dealers, and if a dominant portion of their business was in proprietary products.

RIA Database Top 100 RIA Definitions & Methodology

RIA Database's Top 100 RIA Report ranked registered investment advisors (RIAs) based on assets under management, as defined by the Security and Exchange Commission as of December 31, 2007. Firms were included based on the following criteria:

  1. Greater than 50 percent of their business must serve the retail marketplace.

  2. They must provide financial planning, portfolio management or due diligence on external advisors.

Firms were excluded if they were registered broker/dealers, and if a dominant portion of their business was in proprietary products.

Source: www.RIADatabase.com

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