Only a few years ago, Paul Spitzer would not have been a primary recruiting target for Schwab Advisor Services, the registered investment advisory support/custodian business of the Charles Schwab Corp. In fact, Spitzer barely would have made it onto Schwab's radar. Back then Schwab, the No. 1 RIA-custodian in the business, was still focusing its marketing efforts on wirehouse advisors with more than $50 million in assets who wanted to start their own RIAs. Spitzer, with his $40 million book and lack of interest in running his own shop, wouldn't have fit the bill. But by the end of 2008, when he committed to leaving his wirehouse firm (it had been acquired), the RIA landscape had changed and, in response, so had Schwab's marketing.
In the new environment, Spitzer's $40 million book, while not what you would call “big,” was nonetheless attractive: He manages 100 percent fee-based discretionary accounts, spread among just 25 households, and most of his clients have been with him for decades. After looking at a variety of options — online start-ups and the offerings of independent broker/dealers — Spitzer connected with Concert Wealth Management, an RIA started in 2005 by Felipe Luna, a wirehouse veteran who was exploring new ways to grow his business. Today, Spitzer runs a “branch” of Concert in San Diego. Since February, Spitzer has moved 95 percent of his clients to Concert and recruited five more advisors into the office, netting the firm an aggregate total of $500 million in client assets. He still owns and runs his own book but outsources operations and support and all the other back office tasks (headaches) to Luna. Of course, back office support is Concert's key offering; in exchange for this service, Concert takes 10 to 30 percent of top-line revenue, but it doesn't take a cut of any commission-based transactions or insurance product sales. While the firm doesn't offer upfront signing “bonuses,” it does helps FAs finance up to 3 years of start-up costs.
A Little Help From Your Friends
For brokers, deciding whether to tackle pure independence in the RIA world was once easily resolved by asking, “Do I want to own and operate my own business?” And, “Can I really replicate the back office support and product offerings of a wirehouse?” A few years ago, if you waffled on those questions, you probably stayed in the familiar confines of the wirehouse. That was then, though. These days RIA platforms' technology and product offerings are largely equal to those at the big firms. And FAs who have significant commission-based books, or who have no interest in dealing with the business side of things, or who are looking for a big upfront check comparable to a wirehouse signing bonus — all have options these days in the RIA universe.
RIA firms, with the help of custodians (Schwab, Fidelity, Pershing, LPL, TD Ameritrade and their ilk) and recruiters, are aggressively recruiting from the brokerage ranks. They are finding a receptive audience. As we all know, recent, negative events at the big wirehouse firms (continual bad press, mergers) have caused morale to decline, which in turn inspires advisors to consider other business models.
“A lot of the advisors we're talking to would have been perfectly happy to stay in their firms,” says Barnaby Grist, head of strategic business development for Schwab Advisor Services. “They are guys who have never woken up in the morning and said, ‘I really want to own my business.’” Through the end of July, 86 teams of FAs moved to Schwab's independent RIA platform and the number of “joiners” (versus entrepreneurs) as a percentage of that total nearly tripled this year compared to last. Forty-percent of the 86 teams opted to join existing RIA firms compared to only 15 percent that joined an existing firm in 2008. The average AUM of the joiners is $50 million, he says.
Grist says it still holds true that most advisors coming out of large brokerage firms with more than $100 million in AUM want to start their own firms. Less than that and they tend to want to join. But that's hardly always the case as the success of firms like Concert, HighTower Advisors, Convergent Wealth Advisors and many others have proven: They have all poached many top wirehouse producers in the past couple of years. Whether starting your own RIA or joining another RIA is your interest, custodians will help you run the economics and guide you in your transition, from finding the right platform and philosophy to transferring assets. After all, they want your business. But they aren't the only ones. Specialist consultants who provide soup to nuts transition help for start-ups and joiners have popped up as well.
For joiners, there are essentially three types of firms to choose from: the traditional RIA that offers equity and partnership (or the eventuality of that); private equity or investor-backed holding companies that buy a stake in your business with incentives for growth in exchange for equity in the firm and/or cash as well as the possibility of a big payday IPO (think: HighTower Advisors, United Capital, Focus Financial); and the newest entrant in the space, the COO-type firm that handles the back office and leaves you to run (and own) your business in exchange for a portion of revenues (Concert Wealth Management and SeaCrest Wealth Management are two examples).
According to Mindy Diamond, a recruiter with Diamond & Associates (and a columnist of this magazine), a broker has a lot to consider beyond the right business model, some of which includes:
- Equity ownership: Some firms offer qualified FAs equity in the firm that often grows with successful transition and growth of the FA's business.
- Referrals: Does the firm get referrals from custodians? How many and what is the average account size? How does the firm distribute them?
- Products: For FAs with discretionary control of client assets, will the firm let them build their own customized products? Based on a description of your clients and their goals, ask the RIA to prepare a hypothetical portfolio.
- Fees/Commissions: The three major custodians offer hybrid solutions for FAs with commission business.
Danny Sarch, a recruiter with Leitner Sarch Consultants in White Plains, NY, says he has a growing number of RIA clients looking for brokers, but sometimes there is a bit of culture clash. “Often times you'll find that the two don't speak the same language or have the same expectations,” he says. Not surprisingly, this happens most with RIAs that don't have backgrounds in the brokerage world, says Sarch.
For RIAs, custodians can be a big help with both recruiting and marketing — again, they want your business. Jeff Morrison, a partner with Kistler Tiffany, an RIA in Berwyn, PA, with roughly $500 million in AUM, enlisted the help of Pershing and some outside recruiters to help him find prospects. “We helped Jeff craft a direct mail letter explaining his business and the type of candidate he was looking for,” says Kim Dellarocca, a director with Pershing Advisor Solutions. Kistler Tiffany, which focuses on advanced estate planning and asset management for HNW clients, is looking for an experienced FA with at least $50 million in fee-based AUM with a similar client base. And while they don't give upfront money, they do offer up to 6 months of cash in the form of an interest-free loan to cover likely losses any new hire would take while repapering accounts and waiting for fees to come in. Since the direct mailing went out, Morrison has lined up five prospects for the vacant position at his firm.
In fact, all the custodians provide some type of matchmaking service for their RIA clients and do transition workshops for interested brokers featuring panels of advisors that discuss the ins and outs of transitioning their businesses. Pershing has a website (www.advisorintransition.com ) that promotes the RIAs it already serves with descriptions of their businesses, but also offers FAs curious about independence a questionnaire they can fill out to get feedback about what type of firm might suit them best. At the end of August, Schwab published a research paper titled “A Case for Starting or Joining a Registered Investment Advisory (RIA) Firm,” which does just what the title suggests. It also includes a one-page analysis by the numbers (Schwab's numbers, anyway) comparing the long-term economics of a $1.5 million producer accepting a 9-year forgivable loan to the economics of the same person starting an RIA and selling it after 9 years. Not surprisingly, the conclusion favors the start-up RIA by a large margin. Inherent bias aside, it's something to consider as so many advisors continue to accept large upfront payments from rival wirehouses.
Custodians aren't the only ones helping brokers and RIAs make decisions about hiring and transitioning to independence. A new crop of consultants has emerged to compete with and complement what the custodians are doing. One example is John Furey, founder of Advisor Growth Strategies and the former architect of Schwab Advisor Services' business development strategy. Furey describes himself as a COO for the transitioning advisor, whether he's starting an RIA or joining an existing one. “It's a lot of work transitioning. Custodians do a great job with education, practice management and the actual transferring of assets,” he says. “But at the end of the day, it's the FA who has to execute it, in effect playing project manager.” Of course, project manager (COO) is Furey's role and he says his goal is to take over the transition so that the FA can focus on his clients and continue developing the business. He says he doesn't accept placement fees from b/ds or custodians, and he charges a mix of consulting and “success” fees that vary depending on the relationship. (See the brief checklists Furey proposes RIAs and brokers look over before hiring or joining.) Others like online consulting firm, RIA In a Box, offer more entrepreneurial types another option for starting-up, one the firm boasts on its website is “the fastest, most efficient way to set up an advisory firm.”
Other Friends — For A Fee
For Spitzer, his own research and self-analysis combined with repeated meetings and discussion with Schwab personnel convinced him that starting his own firm wasn't the best idea. “I didn't have the size or the resources and I didn't want to jeopardize my client service,” he says.