Billion-dollar teams inch into indie market

Independent firms are gaining traction among a key group of financial advisers who once shied away from the channel: the $1 billion teams.
Although Morgan Stanley and Raymond James were two of the top firms in adding assets in the first quarter, the other three spots were filled by some relatively new players, according to moves tracked by InvestmentNews’ Advisers on the Move database.
Lebenthal Wealth Advisors, Dynasty Financial Partners and Focus Financial Partners, which ranked third, fourth and fifth, respectively, last quarter by net assets gained, brought in $1 billion or more each, thanks mostly to a single adviser or team. As technology improves, and advisers find more ways to be compensated and choose their affiliation, smaller independent firms are finding success in convincing some big names to take the leap.
More: See the 10 biggest adviser moves of the first quarter
“In the beginning, when people went independent, they were the lower producers who were being ill-treated at major firms and all but pushed out,” said Mark Elzweig, who heads an eponymous recruiting firm. “Now it’s evolved.”
Hal Lambert, a former Credit Suisse Group AG adviser who managed about $1 billion in assets, said that he decided to affiliate with Dynasty last year because he saw that technology had improved, as had the level of support offered by custodians and service providers.
“I looked at [going independent] 10 years ago and it wasn’t quite there yet for what I wanted to be able to provide for clients,” said Mr. Lambert, whose book of business comprises mostly ultrahigh-net-worth clients. “And there wasn’t really the technology there to do all the things that the wirehouses are doing.”
Many of the shortcomings of independent platforms have revolved around areas important to large teams that cater to the ultrawealthy or institutions. Ready access to unique products, such as initial public offerings, for example, or loans pegged to the London Interbank Offered Rate, are still harder to find without sacrificing a level of independence.
“There are only certain places in the independent world you can get that,” Mr. Elzweig said.
But Mr. Lambert, who pays Dynasty for access to its capital markets desk, said that he hasn’t had a problem securing those specific loans for clients while retaining ownership of his book.
Not having as ready access to IPOs hasn’t been an issue because it wasn’t a significant part of his practice, though he acknowledged that it could be a problem if it were.
“They’re really kind of a gateway,” Mr. Elzweig said of Dynasty. “Rather than me having to have a relationship with one firm, I have a relationship with the institutional desks at 10 different firms.”
Timothy Kneen, who left UBS Wealth Management Americas this year to form IFM Capital Advisers, a Focus Financial partner, said that the offerings he found in the independent arena were cheaper in some cases and competitive for his institutional clientele, which includes endowments, foundations and hospitals.
“I can search the planet for where the client’s best rate would be,” said Mr. Kneen, whose team of two managed about $1 billion at UBS. “We essentially eliminated the middleman.”

Footing the bill

That can help make up for some of the other differences. Larger brokerage firms have the advantage of being able to provide concierge services, such as firmwide events open to the children of ultrahigh-net-worth clients, for example, or exclusive home-office visits.
Mr. Lambert said that though his budget for client entertainment was relatively small at his previous firm, he must now foot the entire bill.
That has been a turnoff in the past for some advisers who thought that they would be sacrificing a higher payout while dealing with higher costs and losing out on some of the support of a broader network.
Different compensation models have emerged, however, to make it easier to shoulder the additional expenses and more affordable to expand into a large practice.
A number of so-called hybrid firms, such as Focus and HighTower Advisors, offer different levels of ownership in exchange for equity stake in the company, which is in vogue for many larger teams looking to grow, according to Mindy Diamond, president of career consulting firm Diamond Consultants.
“These newer emerging models figured out ways to allow advisers to not only gain more independence, but also monetize their business to some capacity,” she said. “That’s a piece that was lacking.”
As part of that, independent firms also are offering the capital some of the larger independent firms need to expand and acquire advisers to scale their practice.
Focus, for example, buys a portion of the team’s cash flow and the firm becomes a minority partner in the business. The premise is that the team will then make use of Focus’ equity and cash.
IFM’s bigger goal is to build out a franchise, said Ms. Diamond, who brokered two of the top moves last quarter to the independent space.
“Focus’ deep pockets will help them do that,” she said.
Mr. Lambert said that he joined Dynasty so that he wouldn’t have to give up ownership in his business, and that he has been in discussions with how to receive help expanding without having to cede control.
The hybrid models also are serving to connect independent advisers in new ways.
Mr. Lambert, for example, negotiates with other Dynasty advisers to do niche business that he doesn’t specialize in, such as crafting defined-benefit plans for his clients’ small businesses.
“We’re both totally independent and we’re not owned by Dynasty,” he said. “But we can work collaboratively.”
Lebenthal, successor to a storied firm on Wall Street, offers advisers such as Carrie Galloway, who was part of a $1.2 billion team, partnership and decision-making authority in the firm.
“When somebody joins, it’s not because of a big upfront check,” said Frank Campanale, Lebenthal’s chief executive. “They’re coming because they get equity position in the holding company, have a voice in terms of how we build the company and develop the internal culture, and because the likelihood of some kind of event happening in five years or so like a merger or IPO that allows us to pull that together.”
Lebenthal also opened an independent registered investment adviser channel in January that seeks to allow non-W-2 employees to open franchises in other regions, according to Mr. Campanale.
The firm has yet to hire into that channel, but is in negotiations, he said.
Although the gap continues to shrink, it isn’t likely that there will be a flood of $1 billion producers into the independent channel, Ms. Diamond cautioned.
“There is a lot of exploration typically at the upper end of the market,” she said. “We had a very good first quarter … but having high-quality, top-producing advisers that are exploring their options doesn’t mean they are going to leave.”
Even if technology and payout are equalized, the model is still mostly appealing to advisers who are really looking for full ownership and a different style of practice, Ms. Diamond said.
“All those people had an entrepreneurial spirit, an entrepreneurial DNA,” she said. “They were already kind of running an independent-like practice within an enterprise.”

Related Topics: Financial Performance, Financial Planning, Wealth Management