It’s no secret that in the wirehouse world, branch office managers aren’t getting the respect or authority they once enjoyed. But there is growing demand for their talents in at least one corner of the wealth management universe: newly formed aggregators who are busy buying up firms and opening offices across the country.
Virginia-based Washington Wealth Management and Texas-based U.S. Capital Advisors both are less than a year and a half old, yet have made impressive progress by deploying branch managers as a cornerstone of their business model, enabling them to grow rapidly by more easily bringing on established wealth management teams and firms.
Washington Wealth has $520 million in assets and 16 advisors in four states since it opened in December 2010 and U.S. Capital has $2.3 billion under management and 17 advisors in Houston and Dallas since launching in September 2010.
Both firms are gearing up for more growth this year. Washington Wealth plans to open two new offices in California next month and approximately four to eight more in the Pacific northwest, Midwest and on the east coast by the end of the year, according to Anthony Sirianni, the firm’s chief executive and co-founder.
On Friday, U.S. Capital hired Patricia Trieglaff, a 22 year UBS branch manager veteran, to oversee the firms’ Houston operations, Wealth Management Letter has learned. U.S. Capital also plans to expand its Dallas office this year and is negotiating to open new offices in Austin, New York and Chicago by the end of the year, according to Pat Mendenhall, the firm’s founder and chief executive.
Earlier this month, Washington Wealth scored a major coup by luring San Diego-based wealth manager Billy Blanton, a former star quarterback at San Diego State, away from Morgan Stanley Smith Barney.
Blanton, who managed $170 million in assets, cited dissatisfaction with Morgan Stanley (“it was not a good place to be for my clients”) and confidence in Scott Wilson, a former colleague and branch manager director at Morgan Stanley and Merrill Lynch as the primary reasons he brought his Vintage West Capital Management team to Washington Wealth.
“I know Scott and trust him to help me set up the back office and be able to spend more time with my clients,” Blanton said. “And this business is all about trust.”
The Wilson-Blanton connection exemplifies Washington Wealth’s business model. “Our value proposition is to offer the $1 million-plus advisor a national branch network with local management that takes care of recruiting, compliance and the back office,” said Sirianni, a former executive director for Morgan Stanley Smith Barney and branch manager for Legg Mason. “We start with the guys in the corner offices. They want a manager to support them and take care of their problems. But the wirehouses don’t understand the business anymore. And there are only so many managers out there. It’s a small world, and they are very influential. They can bring in the good wealth managers because they speak their language.”
U.S. Capital’s approach was similar, said Mendenhall, a former top UBS wealth manager. “Branch managers have been re-valued downward by wirehouses, and it’s gotten worse since 2009,” he said. “But I feel that’s my largest opportunity – to find local leadership in markets who are respected by their advisor constituency. They can attract talent because they have developed the relationships.”
While emphasizing branch managers can be useful for attracting advisors, it can also turn off advisors who fear too many layers of bureaucracy and a hierarchy reminiscent of wirehouses, cautioned Michael Kitces, partner at Pinnacle Advisory Group. “The appeal is that the manager understand the business and can give direct support,” Kitces said, “but there may be too many chiefs and not enough Indians, and too many tiers of management can grind efficiency down.”
What’s more, Washington Wealth and U.S. Capital are also competing against larger, more established aggregators, most notably industry leaders Focus Financial, United Capital Financial Advisers, and HighTower, who are all well financed and have all been aggressively pursuing advisory firms and teams over the past year.
So is there room in the market for more newcomers?
The math is indeed favorable for aggregators, said Alois Pirker, research director for Boston-based Aite Group, citing on going research by the firm. “There are a huge number of advisory firms that will change hands over the next few years, and that’s where aggregators come in,” Pirker said. “We estimate that one in three firms will have a succession issue in the next ten years, and that’s a big opportunity for aggregators.”
The availability of new technology solutions, a push for scale and the appeal of liquidity for independent firms and wirehouse teams add up to a “ripe” market for aggregators, according to Kitces. But he also pointed out that aggregators tend to thrive in bull markets, especially if the exit strategy is an initial public offering.
“If you don’t get to do an IPO before the market turns, you could be stuck in a larger firm with less control than you would have had on your own, and you can’t get your equity out,” Kitces warned.
“I think the door is wide open and many firms can be successful,” said Chip Roame, managing partner, Tiburon Strategic Advisors. “We are seeing two movements – the slow movement of leading advisors out of the wirehouses and some movement of independent advisors looking to be part of something bigger. Those two trends meet in the aggregators.”
According to Jeff Spears, head of San Francisco-based outsourcing firm Sanctuary Wealth Management, the key to success for a new entrant in the aggregator market is “if the value proposition is materially different and if they offer economics that are more favorable to the advisor.”
Washington Wealth pays start up expenses for advisors to get their new offices up and running and advisors are given loans to pay back any outstanding commitments to their old firm. Advisors joining the firm within the first 18 months of its founding are given equity from a 30 per cent pool reserved for employees; those joining later have the chance to earn equity. Once on board, advisors receive a 70 per cent payout, i.e. 70 per cent of the annual revenues they generate from clients.
Advisors are not paid as employees of Washington Wealth, but as independent contractors paid on a 1099 tax form who retain equity in their own business. They have the option to brand their office either as Washington Wealth or another name - Blanton’s office, for example will continue to be called Vintage West.
Branch managers will also be given equity in the firm and will be paid salaries as employees who receive a W2 tax form, not a 1099. Washington Wealth is targeting wealth management firms and teams with average assets under management of $100 million to $150 million who have clients with over $500,000 in investable assets, according to Sirianni. The firm remains closely held, and is capitalized by Sirianni, founding partner Eric Nettere and firm president John Simmons. As for an eventual initial public offering, Sirianni said he didn’t find the idea “super appealing” but “is not ruling it out.”
Wealth managers who join U.S. Capitol Advisors are paid a transition package of 100 per cent to 150 per cent of their “trailing twelve,” industry lingo for their revenues over the past year, and are also given equity in the firm. They become U.S. Capital employees and are given a 48 per cent payout on revenues generated from asset fees, as well as a 30 per cent payout on the net revenues generated from a client’s margin balance and credit line.
Branch managers are also given equity in the firm and paid a salary as well as a percentage of the firm’s profits. Average revenue production per advisor is about $1.25 million and the average client has around $4 million in investible assets, although many have over $25 million and some as many as $100 million, according to Mendenhall.
Capitalization comes from Mendenhall and private investors, and Mendenhall said he is currently on a second round of raising money from “ultra-high-net worth individuals.” Mendenhall said he ultimately envisions U.S. capital as a “national boutique” with seven or eight offices around the country.