Electronically reprinted from January

Electronically reprinted from January 2012
How to Play Inflation or Is It Disinflation? / Why You Should Fear the Euro
R
The Source for Financial
Advisors
Elliot Weissbluth
is drawing dozens of
large advisors out
of the wirehouses
and into HighTower,
a rapidly growing
national hybrid RIA.
A Penton Media Publication
Elliot Weissbluth is drawing dozens of
large advisors out of the wirehouses
and into HighTower, a rapidly growing
national hybrid RIA. The exodus
says as much about the state of the
brokerage industry as it does about
what’s happening at HighTower itself.
Raiders of the Wirehouse Ark
By Jerry Gleeson
Photo by Chris Lake
Raiders of the Wirehouse Ark
Although it’s just a few blocks from raucous Times
Square, the Manhattan branch office of HighTower, on the
12th floor of a Fifth Avenue skyscraper, is silent as a corporate
library. But that silence belies a whirl of activity. One morning
in mid-December, Chief Executive Officer Elliot Weissbluth
had flown in from the company’s Chicago headquarters to
meet for four hours with four wirehouse advisor teams, collectively representing $20 million in revenue, who wanted to
know more about the HighTower model. Weissbluth travels
to New York about twice a month; taking all his business road
trips into account, he figures he logs about 130,000 miles a
year. When you’re raiding big players from the wirehouse
world, it’s part of the job.
A hybrid registered investment advisor and broker/dealer
that reports $20 billion in assets, HighTower has been reeling in some of the biggest and best advisors in the business since it opened its doors in 2008. In 2011, eight major
teams representing $5 billion in assets under management
joined HighTower’s partnership. Seven of them defected
from three wirehouses: four from Merrill Lynch, two from
Morgan Stanley Smith Barney, and one from UBS Wealth
Management Americas. Of all the large independent RIAs
that are recruiting from big brokerages, HighTower notched
the most wirehouse deals in 2011—not bad for a firm
that turned three years old just last month. It helped that
HighTower added two new recruiters in late 2010, based
in New York and San Francisco, and a fourth in 2011. That
brings the total recruiting staff to five if you count Weissbluth,
who estimates he spends half his time talking with prospects.
It’s a fairly sizable recruiting team for firms in HighTower’s
space, says Tim Welsh of Nexus Strategy in Larkspur, Calif.;
many only have one or two, or their principals handle it.
“The market can no longer dismiss us because of our rate
of growth and who we’ve brought over,” says Weissbluth, who
speaks energetically and has the lean physique of a cyclist.
(Business travel keeps him from riding as much as he used
to.) More than 90 percent of HighTower’s 67 advisors across
the country hail from the wirehouse channel, a breed coveted
by the RIA aggregators for their breadth of experience and
their deep-pocketed clientele. Weissbluth says HighTower is
on track to mark its first profitable quarter at the end of 2011;
year-over-year revenue was up 250 percent (he doesn’t offer
financial data for the privately-held company’s performance.)
He predicts HighTower’s AUM will double in the next 12 to 24
months. The number of meetings and conference calls that he
and his business development staff run every week has jumped
from about 40 a year ago to between 60 and 70 today, he says.
So what’s so sexy about HighTower? In some ways, it’s very
much like home for wirehouse advisors. A number of the
firm’s key investors and executives hail from Morgan Stanley;
the operating structure is similar to that of the wirehouses
and the hybrid model allows advisors to keep doing commission business; and the transition packages offered are quite
generous. But there are obvious and valuable differences too:
Advisors get a stake in the business, something that those
disappointed by the performance of their stock options surely
appreciate. And those who feel the wirehouse model is too
opaque where financials are concerned likely enjoy the transparency of HighTower’s partnership structure. In addition,
HighTower rarely misses an opportunity for self-promotion,
particularly when it has new partners to crow about. And after
three years, enough wirehouse alumni have signed up with
the firm—as advisors, investors, or leading executives—that it
has acquired credibility with other FAs in the space.
But the emergence of HighTower as a major player in
the independent space also dovetails with the changes that
have shaken the wirehouse industry since the 2008 financial crash. Cerulli Associates estimates that wirehouses will
lose 7.8 percent of their asset marketshare between 2010
and 2013. More than 3,000 financial advisors left the four
top wirehouses in 2009 to move to an independent b/d or
an RIA firm—about 6 percent of all wirehouse advisors,
according to data from research firm Meridian-IQ (though
the exodus has slowed substantially since then as we wrote in
a November issue story). A number of advisors were forced
out by their employers due to rising production quotas, but
others decided the wirehouse model had too many conflicts
and was not serving the best interests of their clients (indeed,
many advisors say their clients made their displeasure with
wirehouses plain.) Wirehouses, of course, beg to differ.
For HighTower, “The view is pretty cheerful,” Weissbluth
says. “We’re offering a solution inside a massive secular shift in
the marketplace. Wirehouse advisors are leaving. They’re not
leaving rapidly, but they’re leaving consistently. Clients, with
ever increasing intensity, don’t want to be clients of these firms.
Their confidence has been shattered.” Other experts argue that
clients love their FAs and don’t care about the firm.
HighTower is in the market for advisors with about $250
million in assets and up, generating several million dollars in
revenue. The size of the book of business is less important
than the reputation of the advisors themselves, Weissbluth
says. “We take branding very seriously here,” he says.
Marketing, too. HighTower isn’t shy about its dealmaking; while some firms are discreet about which advisor
Raiders of the Wirehouse Ark
teams they’ve taken on, each big advisor who signed up with executive director of Private Wealth Management Operations
HighTower last year was the subject of a separate press release at Morgan Stanley. Ann Rieder, hired this year as managing
to the financial media. Welsh calls such releases a top weapon director for business development, was a branch manager and
for firms that want to add FAs. “Whenever the news gets senior vice president at Morgan Stanley Smith Barney.
Of course, HighTower’s operating structure also bears
picked up in the trade or business press, it shows momentum,”
he says. “Advisors are very much toe-dippers and want to some resemblance to the wirehouse model. “They’ve built and
ensure that wherever they go they are not the first one. They are evolving a wirehouse port infrastructure in an RIA wrapwant to know the firm is stable and successful, and nothing per” is how John Furey of Advisor Growth Strategies, describes
shows that better than an industry article or mention showing it. HighTower lets its advisors choose their own custodians.
(Fidelity and Schwab hold the lion’s share of assets, and
that a large team has left a legacy firm for HighTower.”
The higher profile could also help the firm become less of “from a pricing perspective, they’re equivalent,” Weissbluth
a stranger to the capital markets, although it’s done pretty well says.) In addition to providing the back-office support that
in that department so far. HighTower raised $65 million in so many newly-independent advisors need (including coman initial equity round in April 2008, and another $100 mil- pliance reporting, technology services, and a full-time social
lion in a follow-up round about two years ago that included media expert), HighTower maintains a trading desk that hunts
down the best deals for its advithe original investors, Weissbluth
sors on a range of products, often
says. The capital provides the firm
made by the wirehouses that once
with the ability to offer cash and
Elliot S. Weissbluth
employed the advisors. “It does
HighTower equity to advisors for
2008-present: Chief executive officer,
kind of replicate the wirehouse
their practices, making them partHighTower, Chicago
experience in terms of what an
ners in the firm and sharing in the
advisor can and can’t do,” Cerulli
revenue and decision-making. The
2004-2007: President, US Fiduciary, a
analyst Bing Waldert says.
money can help advisors who have
boutique financial services firm
But the firm’s partnership structo reimburse the pro-rated remains
2003-2004: Director of marketing, CRA
ture solves a problem that vexes
of retention bonuses they received
RogersCasey
many wirehouse advisors, says
from their wirehouse employers.
2001-2003: Director, non-traditional
Furey, based in Phoenix, Ariz. A
HighTower determines a value
research group, CRA RogersCasey
client who worked at Merrill Lynch
for the advisor’s practice based on
once told Furey he always wanted
cash flow calculations it shares with
1999-2001: Chief executive, Lightflow Inc.
to know how much profitability he
the potential partner; once a deal is
1993-1999: Attorney, Sussman, Selig &
was contributing to the firm, but
struck, the advisor receives roughly
Ross, Chicago
the production credit system that
half the value in cash and the rest
Merrill uses to determine payouts
in HighTower equity. Once he’s in
1994: J.D., John Marshall Law School
could never spell it out to his satthe partnership, the advisor gets the
1989: B.A., English, Rice University
isfaction. “No one can understand
same payout deal as everyone else:
why the revenue and production
He keeps half of revenue after subtracting expenses, while the rest counts as his ongoing equity credit numbers are different,” Furey says. “It’s just so nebulous.
in the company. Weissbluth says the system incents advisors I actually believe wirehouse advisor grid systems are built to
to manage their expenses while driving “fair and reasonable” confuse people so they never really know what they’re making
revenue. About 90 percent of the company’s revenue is fee- and how profitable they are.” In a partnership, however, the
advisors have access to the firm’s financial data and can see
based, he says.
“From the beginning HighTower was designed to be the how their practice contributes to the bottom line, he says.
Another way in which wirehouses and HighTower are
catcher of the corner-office wirehouse guys,” Welsh says.
“They have the ability to cherry-pick the best. They don’t distinctly separate, in Weissbluth’s view, is independence of
need to take 10 guys out of an office.” The wirehouse cred- investment product. It’s a subject on which he and at least
ibility of some of HighTower’s key investors is definitely part one brokerage official sharply disagree. Weissbluth says that
of the appeal, he says. These include former Morgan Stanley wirehouse advisors can’t go outside of their platform and
CEO Phil Purcell and Doug Brown, Morgan Stanley’s for- get the best mutual funds and other investment products at
mer vice chairman of Investment Banking (ex-Schwab CEO the lowest prices. That poses a conflict of interest that serves
David Pottruck also has a HighTower stake; he and Brown co- investors badly and gives some advisors pause; they feel they
chair the board of directors.) The name Morgan Stanley also can’t be truthful about client concerns, Weissbluth says.
“They have to say, ‘I’m doing the best I can,’ or, ‘Sorry that
pops up on the resumes of several other executives at the firm.
Chief Operating Officer Michael LaMena was formerly the somebody in Europe lost $2 billion on a trade.’ The advisors
At A Glance
Raiders of the Wirehouse Ark
Advisors in High Places
HighTower Advisors has drawn most of its advisors from the wirehouses. Here’s a list of who signed up
in 2011, and from where.
Name of practice
Location
Date of announcement
AUM
Previous firm
Steve Bogner*
New York
Jan. 12
$80 million
Morgan Stanley Smith Barney
Private Wealth Management
Simmons Wilkes Investment Advisors
Portland, Maine
Feb. 23
$500 million
Merrill Lynch
Masterson, Emma & Associates
Naples, Fla.
1-Mar
$350 million
Merrill Lynch
Amidei Romano Group
Palm Desert, Calif.
2-May
$375 million
Merrill Lynch
Blanke Schein Group Palm Desert, Calif.
31-May
$300 million Morgan Stanley Smith Barney
VWG Wealth Management (John Verfurth,
Vienna, Va.
13-Jul
$700 million Morgan Stanley Smith Barney
Richard Weeks, Jeff Grinspoon)
Pagnato-Karp Group
Washington, D.C.
Aug. 1
$1.3 billion
Merrill Lynch Private Banking
and Investment Group
Margaret M. Towle
Seattle, Wash. Aug. 18
$1 billion
Greycourt
and Minneapolis, Minn.
The Leventhal Group
Bethesda, Md.
Sept. 19
$400 million
UBS Wealth Management
Americas
* Tuck-in
we talk to say, ‘I’m defending my firm every week to my clients
and I don’t believe what I’m saying. But I don’t have a choice.
What am I supposed to do?’ We hear that weekly.”
His view was disputed by Christine Pollak, spokeswoman
for Morgan Stanley Smith Barney. “We would say that it’s
unfortunate that this individual has to resort to lies to sell his
business model. Morgan Stanley is 100 percent open architecture, and there is no pressure to sell in-house product,” she
says. “It’s been true for a while.”
Weissbluth called Pollak’s statement misleading. He said
he’s not asserting that Morgan Stanley Smith Barney requires
its advisors to buy its products, but it does require advisors to
buy products through its trading desks, where the prices are
inflated in an opaque manner. The difference between buying
through the trading desk and buying directly on the street
amounts to “tens of basis points of spread, which in today’s
marketplace is massive,” he says.
“HighTower is not anti-Wall Street,” Weissbluth adds.
“We will sharply criticize the way the advisory components
of these fully integrated businesses abuse the confidence and
trust of their customers, but this is not an anti-Wall Street
business.” HighTower, he notes, is buying the products that
Wall Street is selling.
Advisors who joined HighTower this year strongly agree
with its philosophy. Mark Masterson and David Emma, who
left Merrill Lynch in March to sign up with HighTower, say it
became difficult to manage their multi-family office within
the confines of Bank of America’s corporate structure.
“To get things done, each business seemed to have its
own silo, its own structure. It became annoying, it became
frustrating,” Masterson said. “The wirehouse model, for a lot
of reasons, is really dying. The public is tired of the conflicts
Source: HighTower Advisors
of interest that litter the landscape.” Merrill Lynch did not
respond to a request for comment.
Dissatisfaction with the wirehouse model will continue
to fuel growth in the independent channel, says Shirl Penney,
chief executive at Dynasty Financial Partners, a service provider to large independent RIAs. He sees room in the market for 10 more firms such as HighTower and aggregators
like Focus Financial Partners and United Capital Financial
Partners. “Because the industry is very fragmented. And the
more players that come in, and we continue to grow more
critical mass in the independent movement, the better collectively everyone in that space will do,” he says.
Weissbluth sees HighTower offering new services to its
clients in the years ahead, depending on what their clients are
demanding. “Would HighTower expand and work in the middle market M&A space on behalf of our clients? Probably,” he
says. “We’re already seeing a demand for multigenerational tax
planning…At the end of the day, we’re only making money if
we’re delivering value to our clients. We’re not making money
if we cook up some product and sell it to them.”
One thing that’s not in the short term is a cashout by
HighTower’s investors, he says. “There’s no pressure from
our investors to grow any faster than we think is healthy,”
Weissbluth says. “And they’re also sophisticated enough to
know this is a business about delivering a high quality experience to financial advisors.
“There’s always going to be a tension between the ability
to grow quickly and making sure you’re doing all the things
you’re supposed to,” Weissbluth says. With hundreds of billions of dollars expected to move out of the wirehouse channel in the next few years, “We could grow very rapidly and still
never scratch the surface of this marketplace.”
●
Posted with permission from January 2012. Registered Rep, Penton Media, Inc. Copyright 2012. All rights reserved.
For more information on the use of this content, contact Wright’s Media at 877-652-5295
84400