Plying a path that sometimes has proven perilous, a fledgling independent broker-dealer is staking its claim in the marketplace by offering financial advisers and their wealthy clients access to high-stakes private-equity, venture-capital and investment-banking deals.
DeWaay Financial Network LLC, which had $12.4 million in revenue last year, is a rarity among independent broker-dealers, at which advisers typically sell such packaged products as mutual funds and variable annuities.
Most recently, GunnAllen Financial Inc. proved how risky the private marketplace can be. The firm shut down in March because it faced millions in dollars of liabilities, in large part from disastrous private placements.
On the other side of the equation, Raymond James Financial Inc. has managed both deal-making investment bankers and advisers who provide financial planning and advice for more than two decades.
DeWaay Financial, opened three years ago in Clive, Iowa, by a top-producing broker, Don DeWaay, saw its profile significantly raised this month after it recruited Erin Botsford from FSC Securities Corp. Her team, which produced $3.5 million in fees and commissions, is a high-profile advisory group that espouses risk management as the cornerstone of financial planning.
Mr. DeWaay in the past has consistently produced $8 million in fees and commissions per year. Last year, he generated about $4 million in revenue, according to filings with the Securities and Exchange Commission.
His firm, which clears through Pershing and has eight offices and 30 advisers, has been looking to expand over the past six months.
Ms. Botsford's decision to join a shop that manufactures financial products such as late-stage private-equity funds surprised some. Others noted that creating such deals and selling them to independent representatives' and advisers' wealthy clients is difficult.
“Don is a great marketer and a good solid businessman,” said Donald J. Beary, chairman of the broker-dealer VSR Financial, where Mr. DeWaay was a rep for 17 years before starting his own firm. “The late-stage [deals and funds] that they package as their own product — that's on the higher risk profile. What Don is doing, very few broker-dealers have been able to package product successfully.”
DeWaay Financial is also plowing into the independent-broker-dealer marketplace at a time when securities regulators have a heightened awareness of the risks of selling private securities. The Securities and Exchange Commission last summer filed charges alleging that two such deals, the $2.2 billion Medical Capital Holdings offering and the $485 million Provident Royalties offering, were fraudulent.
“I don't think private investments are inherently more risky,” Mr. DeWaay said in an interview last week, noting that many wealthy clients accumulate their fortunes directly from ownership of businesses and real estate.
DeWaay Financial exerts much more control over the deals its sells — typically in $25,000, $50,000 and $100,000 slices — than the typical broker-dealer, he said. At any given time, 25 to 40 offerings are on the firm's platform, Mr. DeWaay said.
“Most firms just dabble in this kind of stuff. They don't make it a priority,” he said, adding that investors should question whether firms they deal with spend enough time doing “proper due diligence” on private deals.
“We watch over what happens. We tend to be far more deliberate. We sit on boards, and have control over money, as much as we can,” Mr. DeWaay said.
There is plenty of room for small firms to work in the investment-banking arena, said Mark Goldwasser, chief executive of National Securities Corp. Since the credit crisis forced Lehman Brothers Holdings Inc. to file for bankruptcy and pushed The Bear Stearns Cos. Inc. into the arms of JPMorgan Chase & Co., the universe of bulge-bracket firms has been depleted, giving smaller firms like DeWaay Financial and others an opening, he said.
But the opportunities carry risk.
One DeWaay Financial rep and adviser, Larry Labine, faces four lawsuits carrying possible damages of $1.7 million stemming from in private investments and sales of variable annuities. In December, Mr. Labine returned $100,000 to a client after the client requested that a transaction be rescinded, claiming that the product, a private deal, was not appropriate.
BAD SITUATION
Mr. Labine was the lead fund-raiser for DeWaay Financial on an offering called Domin-8 Enterprise Solutions Inc., a software company, according to industry sources familiar with knowledge of the offering.
GunnAllen Financial sold about $40 million of Domin-8 in three rounds of debt to investors, and then DeWaay sold a final, later round, the sources said.
Choking on debt, Domin-8 collapsed. The company filed for Chapter 11 bankruptcy protection last September, and neither GunnAllen nor DeWaay Financial emerged from the bankruptcy proceeding controlling the company.
Mr. DeWaay said he was watching Mr. Labine's situation.
“Of course, the current situation concerns me, and but we're waiting to see the merits of those cases,” he said. “Larry's circumstances are an isolated case in this company, and any organization such as ours would be very attentive to this issue.”
DeWaay Financial is courting other high-profile advisers, re-cruiters said, and is seeing success. On May 14, Thomas Karsten, with about $180 million in client assets and $2 million in annual fees and commissions, left H.D. Vest Investment Services to join DeWaay Financial.
Mr. DeWaay said that Ms. Botsford “was out exploring other opportunities and she was somewhat ambivalent about a guy from Des Moines with a fledgling broker-dealer.”
She “saw the practice, and the scope of offerings. We're looking for entrepreneurial, sophisticated reps who want to grow their businesses ethically,” Mr. DeWaay said.
In the future, the firm will contemplate offering advisers equity in the firm, he said.
E-mail Bruce Kelly at [email protected].
