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, are 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 in 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. Last year 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 four—five if you count Weissbluth, who estimates he spend half his time talking with prospects. That’s fairly sizable 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 as part of their responsibilities.
So what’s so sexy about HighTower? In some ways, it’s very much like home for wirehouse advisors. Some of the firm’s key investors and executives hail from Morgan Stanley; the operating structure is similar and the hybrid model allows advisors to keep doing substantial 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.)
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.”
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 teams they’ve taken on, each big advisor who signed up with HighTower last year was the subject of a separate press release to the financial media. Welsh calls such releases a top weapon for firms that want to add FAs. “Whenever the news gets picked up in the trade or business press, it shows momentum,” he says. “Advisors are very much toe-dippers and want to ensure that wherever they go they are not the first one. They want to know the firm is stable and successful, and nothing shows that better than an industry article or mention showing that a large team has left a legacy firm for HighTower.”
The higher profile could also help the firm become less of a stranger to the capital markets, although it’s done pretty well in that department so far. HighTower raised $65 million in an initial equity round in April 2008, and another $100 million in a followup round about two years ago that included the original investors, Weissbluth says. The capital provides the firm with the ability to offer cash and HighTower equity to advisors for their practices, making them partners in the firm and sharing in the revenue and decision-making. The money can help advisors who have to reimburse the pro-rated remains of retention bonuses they received from their wirehouse employers.
HighTower determines a value for the advisor’s practice based on cash flow calculations it shares with the potential partner; once a deal is struck, the advisor receives roughly half the value in cash and the rest in HighTower equity. Once he’s in the partnership, the advisor gets the same payout deal as everyone else: he keeps half of revenue after subtracting expenses, while the rest counts as his ongoing equity in the company. Weissbluth says the system incents advisors to manage their expenses while driving “fair and reasonable” revenue. About 90 percent of the company’s revenue is fee-based, he says.
“From the beginning HighTower was designed to be the catcher of the corner-office wirehouse guys,” Welsh says. “They have the ability to cherry-pick the best. They don’t need to take 10 guys out of an office.” The wirehouse credibility of some of HighTower’s key investors is definitely part of the appeal, he says. These include former Morgan Stanley CEO Phil Purcell and Doug Brown, Morgan Stanley’s former vice chairman of Investment Banking (ex-Schwab CEO David Pottruck also has a HighTower stake; he and Brown co-chair the board of directors.) The name Morgan Stanley also pops up on the resumes of several other executives at the firm. Chief Operating Officer Michael LaMena was formerly the firm’s executive director of Private Wealth Management Operations at Morgan Stanley. Ann Rieder, hired this year as managing director for business development, was a branch manager and senior vice president at Morgan Stanley Smith Barney.
Of course, HighTower’s operating structure also bears some resemblance to the wirehouse model. “They’ve built and are evolving a wirehouse port infrastructure in an RIA wrapper” is how Furey describes it. HighTower lets its advisors choose their own custodians. (Fidelity and Schwab hold the lion’s share of assets, and “from a pricing perspective, they’re equivalent,” Weissbluth says.) In addition to providing the back-office support that so many newly-independent advisors need (including compliance reporting, technology services, and a full-time social media expert), HighTower maintains a trading desk that hunts down the best deals for its advisors on a range of products, often made by the wirehouses that once employed the advisors (HighTower recently broadened its access to hedge funds, at the behest of its advisors, Weissbluth says.) “It does kind of replicate the wirehouse experience in terms of what an advisor can and can’t do,” Cerulli analyst Bing Waldert says.
But the firm’s partnership structure solves a problem that vexes many wirehouse advisors, says John Furey of Advisor Growth Strategies in Phoenix, Ariz. A client who worked at Merrill Lynch once told Furey he always wanted to know how much profitability he was contributing to the firm, but the production credit system that Merrill uses to determine payouts could never spell it out to his satisfaction. “No one can understand why the revenue and production credit numbers are different,” Furey says. “It’s just so nebulous. I actually believe wirehouse advisor grid systems are built to confuse people so they never really know what they’re making and how profitable they are.” In a partnership, however, the advisors have access to the firm’s financial data and can see how their practice contributes to the bottom line, he says.
“They have to say, ‘I’m doing the best I can,’ or, ‘Sorry that somebody in Europe lost $2 billion on a trade.’ The advisors 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 of interest that litter the landscape.” Merrill Lynch did not respond to a request for comment. HighTower, Masterson adds, offers “almost all the benefits of complete independence,” but it also has economies of scale that allow it to negotiate lower prices for custodial and other services, something a fully independent advisor can’t do.
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. So if they need more sophisticated lending or more sophisticated insurance, that will guide our strategic development.”
One thing that’s not in the short term is a cashout by HighTower’s investors, he says. “They’re already very happy. There’s no pressure from our investors to grow any faster than we think is healthy,” Weissbluth says. “We’re delivering the results that we promised we’d deliver. 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.”