The best financial advisors on Wall Street used to be lone cowboys, men (yes, men) who worked alone, did things their own way, made independent investing decisions and, after the firm took its cut, kept all the commissions they made on client accounts for themselves. But the business has certainly changed. These days, there's no question that some of the most successful financial advisors in the industry are those who are part of a team. It's an approach that advisors in all channels can agree on — RIA, dually registered, independent broker /dealer, wirehouse.
Of course, there are as many ways to structure a team as there are kinds of advisors, but the benefits are pretty clear, says Scott Slater, managing director of business consulting for Schwab Advisor Services. Teams tend to be more productive than solo operations, both in terms of operating efficiencies and revenue generation. In fact, about 40 percent of the advisors who have joined Schwab in the last year have joined existing RIAs rather than start their own. “When firms reach a certain level of assets and revenue, the advisors have to decide what roles everyone should take on,” Slater says. “Before that, everyone seems to do a little of everything. But at $400 million in assets and a couple million in revenue, you don't want one advisor acting as the general manager, the marketing director and the business development manager all at the same time.”
The benefits have also become clear to advisors in the wirehouse and independent broker/dealer channels, says Cerulli Associates senior analyst Scott Smith. “Sure there are still advisors who don't want the responsibility of being in charge of an entire team, but if the structure is set up correctly [forming a team] can be incredibly efficient,” Smith says. In fact, advisors cited improved efficiency and the ability to focus on core competencies as the biggest benefits of working in teams, according to a 2009 Cerulli survey. “Anything an advisor does besides sitting with clients is costing the firm money, not making it money,” Smith adds.
A key to success for teams is making sure all team members are assigned (and understand) specific roles and responsibilities. This can be a tough task, and Smith says it's important to put it in writing in order to avoid any friction in the initial stages of the team's operation. Sometimes the roles are easier to assign if the team members already focus on separate tasks.
“Sometimes two people on the same team enjoy working on the same part of the business. But an honest conversation needs to happen,” says Slater. “At that point it should become a conversation about who is better at what, rather than finding out what everyone likes to do.” He adds, “Figure out what functions the team needs to perform and fill those functions with people. Don't simply fill in existing jobs.”
One wirehouse advisor says when he and his partner first formed their partnership about four years ago neither was thinking about specific roles they'd take on. “We would be doing the same activities as one another without thinking twice,” he says. “Granted we were generating more revenue than we had been when we were on our own, but we still weren't making the most out of the alliance.” Eventually, the two sat down and discussed what skills they each had, and what they still needed. “It's a much less scattered approach. You both know what the other person is responsible for, and you both work to compliment the other person. There's a depth now, and that's what is attracting clients.”
Every advisor team goes through its own unique growing pains. In the following pages, we profile three teams who share their success stories and some of the bumps they faced along the way. And though each team has been operating for at least 20 years, each one seems to be continuing to adjust the way it operates. The Center for Financial Planning is working on a firm-wide profit pool that would be paid out to team members (including administrative staff) based on contribution rather than pure revenue generation. Gateway Advisory's lead partner is a 61-year-old wirehouse veteran who brought his team over to the RIA world just nine months ago. Is he concerned about making the move to independence at this stage of his career? “I've known my partners longer than they've known their own wives. I'm in good hands,” he says.
City: Southfield, MI
Teams Profile: Center for Financial Planning
Established: 1985
Team size: 20
Partners: 4
Total number of advisors: 7
AUM: $640 million
Production: $4.5 million
Households: 624
Next year, the Center for Financial Planning will lose one of its four partners to retirement. The retiring partner, Marilyn Gunther, helped found the firm in 1985 and has built a book of business of about $160 million assets and 150 clients. Many of those clients have worked exclusively with Gunther and could potentially leave the firm when she does. But the remaining partners at the Southfield, Mich.-based firm aren't very concerned.
Why? Because Gunther's clients have been slowly transitioning into the books of the remaining FAs at the firm over the last couple months and will continue to do so through the end of the year. The clients have been meeting with Gunther as well as a second planner who has been designated to take over the clients' assets. “This is one of the benefits of being part of a team,” says Tim Wyman, a partner with the firm. “You're able to provide continuity and a legacy to clients, staff and partners at once.”
Wyman and his partners know the benefits of this process from experience. About seven years ago, when another partner was retiring, they went through the same process. The firm, which is dually registered with Raymond James Financial Services, was able to retain 90 percent of the departing partner's assets. “It works out for everyone,” Wyman says. “The clients don't have to find a new relationship on their own. They keep the same investment philosophy and financial planning process, and the firm doesn't lose the revenue or cut back on staff.” The retiring partner benefits as well since his or her earn out is based on how much of the clients' assets remain with the firm.
When Wyman joined the Center for Financial Planning in 1999, that's the kind of structure he was looking for. Prior to that, he'd been running his own practice for 10 years as an independent b/d rep and he says he was looking to either build his own team or join an existing one. “By plugging myself into the Center for Financial Planning, I felt like I was able to fast-forward my career. I really liked the interdependent nature of the team approach. It gives you a sense of balance and freedom.”
But there is a trick to making the team approach work, he says. “You have to really be willing to say the client comes first, the team comes second and you, the individual, come third. If that's not okay, then it's not for you.”
Teams Profile: Gateway Advisory
City: Westfield, NJ
Established: RIA, 2010; Wirehouse team 1984
Team size: 7
Partners: 4
Total number of advisors: 4
AUM: $250 million
Production: $1.6 million
Clients: 285 wm clients, 10 retirement accounts
After 28 years as a financial advisor, you'd expect 61-year-old Paul DeRosa to be thinking about his retirement. Instead, he is busy talking about the future of his advisory practice and saying things like, “I am excited about the opportunity to finally build my own business.”
That's because, in January, DeRosa moved his team, which includes three other partners from Merrill Lynch to launch Gateway Advisory, an independent RIA in Westfield, NJ. The team managed $600 million for Merrill Lynch. So far, nearly all of their retail assets have followed them to the new firm, but the retirement accounts have taken longer to move. Still DeRosa expects to bring most of them over, too.
This kind of breakaway move is typically associated with advisors with shorter careers behind them. But DeRosa says the timing of the move was more about his clients and his team than his age. “We knew for a long time we had to make a change but there wasn't a good time until recently,” he says. “The support and technology on the independent side was no longer inferior to what we were accustomed to, and more importantly we felt the move wouldn't be detrimental to our clients.”
When DeRosa started building his team in 1983, he quickly realized that his target clients (corporations) were more receptive to advisory teams than individual FAs. So he linked up with a fellow rep to address that issue. “The companies whose retirement plans we were looking to consult on wanted depth from advisors. Approaching them as a team worked out much better for us,” he says. Eventually, the corporate clients started seeking wealth management advice for their own personal assets. “As that demand started to increase, we became a dual operating practice where we did both retirement consulting for corporations as well as wealth management for individuals,” he says.
Today, DeRosa and Glenn A. Blachman run the retirement part of the business while Brian J. Power and Jay H. Flamme manage the wealth management side of the firm. DeRosa says, “The top-down vertical team approach didn't work well for me. I wanted an equal partnership where clients aren't looking for the most senior partner every time they call.”
During the team's years at Merrill, its core retirement consulting business took a bit of a backseat to the wealth management business. Now as an independent RIA, Gateway Advisory can act as a fiduciary to corporate retirement plans — something they couldn't do at the wirehouse. “I don't know how many times Glenn and I had to walk away from potential clients who were looking for us to act as fiduciaries. Our belief now is that our retirement consulting business will ascend to be the bigger part of our practice once again,” DeRosa says.
Teams Profile: The Lockhart Sanders Group
City: Smithtown, Long Island
Established: 1999
Team size: 5
Partners: 2
Total number of advisors: 2
AUM: $600 million
Production: $3 million
Households: 125
Everyone knows the cliché about marriage: “I married you for better or for worse but not for lunch.” Consider the Lockhart Sanders Group. Michael Lockhart and Linda Sanders, the two partners of a team at Merrill Lynch, are married; they have two sons. They met on the job back in the mid-1980s (they both worked for Merrill), eventually worked in the same office and were married within five years of meeting. That was back in the mid-1980s. But the pair didn't form a team — an advisory team — until 15 years after running their own separate books of business.
“We used to say we could never work with each other,” says Sanders. “But it has been fulfilling. We don't have the problems that other teams have.”
For example, there is no arguing over compensation — their production ends up in the same wallet, so to speak. This is not to say that the couple, er, team, winged it. “We've done the team analysis,” says Lockhart. And, like other financial advisors who decide to team up, combining books wasn't easy. “It took a good two years to meld [our books],” says Lockhart. That was true despite the compelling reason to join forces: “We have complimentary skill sets,” Sanders says.
Lockhart is investment oriented and markets focused; he specializes in equity and fixed income trading and concentrated stock strategies, and investments. And Sanders is a CFP and handles the financial planning for their high-net-worth clients. Lockhart says it took a while to completely integrate their practices because their books were so different. Lockhart had younger, more aggressive and wealthier clients who liked to trade. Sanders' clients were older and more conservative; she typically used managed money.
Today, their clients typically have between $3 million and $10 million; the clients' ages range from their mid-40s to their 60s, Sanders says. “Seventy,” Lockhart corrects her. In short they have clients who are accumulating wealth and clients who are living off of their net worth. Either way, Lockhart says, they tend to use a core and satellite strategy with municipal bonds and large-cap managed money for the core; alternative investments and sector ETFs for the satellite. They tend to be conservative with their clients' money. “We tell them they could lose 30 percent, and clients will say that's fine, they can handle that risk. But when we tell them they could lose $1.5 million, they say, ‘Whoa. I don't want to lose that much money.’ Which is why I always put things in dollar terms.” How did they get to where they are now? The way everyone does. “There is no secret to building a big business,” Sanders says. “It's hard work and finding out what the client needs.”