Michelle Smith, CEO of Source Financial Advisors is a dynamo.Standing 5’8’ tall with her hallmark head of gorgeous silver gray hair, the 48 year old Smith describes herself as a “zero to 100 mph kind of person; there is rarely a gray area with me.” Michelle has logged more than 30 years in this business. In this interview, Michelle discusses her decision to leave the wirehouse world 6 years ago (she was a “breakaway broker” long before the term was even coined), her partnership with her mother, and her vision for Source Financial Advisors, the specialty boutique wealth management firm she launched several months ago.
MINDY DIAMOND: Tell me about yourself. Who is Michelle Smith?
MICHELLE SMITH: I am a divorced mother of an awesome 11 year old son who happens to have Down Syndrome. He is my pride and joy. I am an all or nothing kind of person. Perhaps the best example of this is my recent decision to train for the NYC Marathon. I decided awhile back I wanted to make a commitment to running and couldn’t do it half way- I dove right into training for the marathon. I’m a problem solver and a very direct person.
MINDY DIAMOND: Tell me about your professional history including your recent stint as founding partner of Alexandra & James, a Lebenthal wealth management firm?
MICHELLE SMITH: I spent the first 5 years of my career at Merrill Lynch which is where I teamed up with my mother, Corrine Smith, who had been a fabulous financial advisor and portfolio manager for years before I got there. Then, we moved together to PaineWebber where we spent 10 years and then we went to Wachovia (and its predecessor firms) for 7 years.Alex Lebenthal and I had been friends for about 10 years prior to the Lebenthal eventual sale to Merrill. When Alex chose to leave Merrill, she came to me and shared my vision of creating an independent wealth management firm with family office capabilities. Together, we co-founded Alexandra & James Co. in 2006. It was a wonderful introduction to independence but I decided to launch Source Financial Advisors because I wanted to create a firm of specialists. Lebenthal Municipal Asset Management still remains our muni manager of choice because we believe they are the best at it, and it aligns with Source’s theme of sticking with specialties. We want everything at Source to be specialized, focused, and a niche.
MINDY DIAMOND: Source Financial Advisors is a relatively new boutique firm but you, as its leader, are certainly not new to managing clients’ money and doing it for a niche set. Tell us what your vision is for Source and what its value proposition is.
MICHELLE SMITH: Source is a firm of specialists that serves clients who are dealing with major financial events in life such as divorce, sale of a business, liquidity events in their companies, or concentrated stock decisions. There is no firm out there like Source today. Other firms say they specialize in managing money post-divorce settlement or post liquidity event. We have the breadth of experience vertically to guide clients through the event, not just after it. We have professionals such as Divorce Financial Analysts and ESOP specialists on our team.
MINDY DIAMOND: What does your staff look like today? How do you anticipate building out your infrastructure?
MICHELLE SMITH: Today, we are a staff of 11 and we intend to grow proportionately and strategically as the business grows.
MINDY DIAMOND: Tell me about the partnership with your mother and the role that she plays today at Source?
MICHELLE SMITH: My mother is a portfolio manager and a partner at Source. She is an integral part of our organization and still very much involved.
MINDY DIAMOND: What does your client base look like? How much in total assets do you manage and advise to?
MICHELLE SMITH: Our sweet spot is between $2 and $20 million and that tends to be the typical client profile. We consult, manage or advise on close to a billion dollars and that includes assets where we are just doing the asset allocation and the consolidated reporting.
MINDY DIAMOND: I know that you have some strong feelings about why you’ve chosen to build a specialty niche firm versus being a generalist. Can you share a little bit about that philosophy?
MICHELLE SMITH: I think the age of the generalist is over. The real question is: “What’s your value proposition?” Investments are investments; everybody can do asset allocation; technology has become amazing and the platforms are all looking very similar. So what sets you apart? After almost 30 years of experience in this business, I see a major shift of wealth to a younger generation and there’s a female demographic rising. You have to specialize in order to help these groups of people and a lot of times things center around financial transitions, the money in motion. This specialist approach is not marketing or advertising. Specialties require focus and deep knowledge and expertise in the client’s monetization event itself. I think you have to immerse yourself in something you really like to do and be honest with yourself with what you're good at and become a specialist in that area and then concentrate on how you are going to network with centers of influence in that specialty.
MINDY DIAMOND: And who are your primary centers of influence?
MICHELLE SMITH: Matrimonial attorneys, accountants and all the professionals involved with concentrated stock positions, whether that’s securities attorneys, estate planning counsel, etc. To me, that’s your leverage and that’s your scale and that’s your power. Saying I’m a specialist in divorce is powerful—it’s a show stopper. What I specialize in resonates with people.
MINDY DIAMOND: So you’ve chosen to partner with Dynasty Financial Partners (Dynasty is the leading provider of investment and technology platform for independent advisors with sophisticated client needs). What went into that decision? What does Dynasty do for you? How does it factor into your overall equation?
MICHELLE SMITH: I call Dynasty the “RIA SWAT Team.” I had a breakfast with Todd Thomson (one of the founders and principals of Dynasty) last year and halfway through breakfast listening to what he built, I thought, “Oh my God, six years ago when Alex and I started our business on our own, I was like a general contractor doing it all.” And I’m listening to him and all I could think about was “wow”, this is going to be an industry changer. They have figured out the independent advisor space and how to support you where you are and where you want to grow with what you need.
MINDY DIAMOND: So give us an example of the most powerful thing they’ve done for you.
MICHELLE SMITH: I had to execute a large post-IPO variable prepaid forward and collar transaction for a concentrated stock position. I won this business because I was able to shop it to investment banks right to the institutional level and have them all compete and come in with pricing. Because of Dynasty’s power and connectivity, I was able to get four investment banks that lined up and I was able pick the one with the best pricing and opportunity for this deal for my client.
MINDY DIAMOND: That’s a great example. Do you have another?
MICHELLE SMITH: Another example relates to lending. I was at a hedge fund conference in May over Mother’s Day weekend this year. An attorney I had previously done work with walked up to me and said, “Do you offer high end lending?” I said, “Yes.” He said, “I need a $15 million loan in four days.” I called Todd (Thomson), who was at the conference as well, and as if by magic, we had banks bidding on and getting this client a desperately needed bridge loan--in four business days.
MINDY DIAMOND: Why couldn’t the client’s lending needs have been satisfied as expeditiously within the wirehouse world?
MICHELLE SMITH: Can we show facial expressions in this article? Oh my God, can you imagine? You can't bid business if you work for a company. End of story. It’s not objective. You're not a consultant. It’s either the wirehouse or nothing.
I couldn’t have done this without Dynasty. How am I going to get on the phone with four senior bankers that I had no relationship with? I couldn’t have done it. This really opened my eyes. Dynasty brought an opportunity to the table that I was not only never going to get on my own, but made it possible to win business I would never even have gone after – a $200 million transaction.
MINDY DIAMOND: Let’s get to the next piece, which is all the talk in the industry about the “breakaway broker” (a wirehouse advisor who leaves the wirehouse and goes independent). You were a breakaway broker before the term came into vogue.
MICHELLE SMITH: Yes, I was. I was cutting edge (with a smile).
MINDY DIAMOND: If you were talking to a wirehouse advisor that said, “I believe that given my high net worth client base, I need a name brand firm behind me and the platform that the wirehouses provide in order to be successful.” What would you tell them?
MICHELLE SMITH: It’s such a myth. At a big firm you are myopic to a fault. And I understand this myth because I bought into it for years. I should have left and gone independent in 2000 when I was with PaineWebber. But I didn’t because I believed I needed a big firm under and behind me. I feared I would lose access to the right people and solutions. Now that I stepped out of that, I realize I’m standing here as an independent not on an island alone, but surrounded by an infinite number of firms, solutions and thought leaders, not just one wirehouse—I am scaffolded exponentially.
MINDY DIAMOND: But part of what comes up with that is the possibility of being overwhelmed by too many choices. Is it fair to say that part of what Dynasty does for you is to give you access to the right choices?
MICHELLE SMITH: Dynasty gives us access not only to the right choices, but the right customized choices for our business and our clients. They give us access and credibility.
MINDY DIAMOND: Anything you miss about the plug-and-play wirehouse world?
MICHELLE SMITH: Yes, I miss calling somebody in IT and having five people answer the phone. I know more about my copy machine than I ever wanted to know. I miss having my people making a call and then just like that there are technology elves that fixed everything. But I quickly came to realize that I can hire someone, or call someone or outsource almost any issue.
MINDY DIAMOND: How about the clients? How did your clients react to your decision to go independent and how do you believe that the decision impacted your prospecting and business development opportunities?
MICHELLE SMITH: My clients were my clients. I think in 2006, we were pre-Madoff and pre-meltdown. Nobody cared where you custodied. Nobody asked. New clients now ask where we custody assets. There’s a difference. People understand what could go wrong--they're more educated. But even now it’s not a problem. Clients end up with the advisors they trust as long as you can demonstrate that you can do the job for them and their money is safe. We clear through Fidelity. It’s Fidelity; they are huge. You can clear through so many big firms. That stuff is easy to talk about. You show them that they aren’t going to get a statement on an Excel spreadsheet. That’s the easy part.
MINDY DIAMOND: Have you ever lost a prospect or a business opportunity because you were not with a name brand firm?
MICHELLE SMITH: Yes, just like I lost business when I was in a big firm because I wasn’t a boutique.
You're going to get the clients that should be with you and the ones you don’t, you move on. There is no shortage of money in this country. If they're supposed to be yours, they will be. That is my mantra here. You do the best you can at a presentation. They're either going to connect with you, your methodology and your business structure or they're not.
MINDY DIAMOND: What other options did you consider before you made the decision to go independent? I mean with wirehouse deals being at an all-time high, did that ever enter your mind?
MICHELLE SMITH: Yes, that check was hard to resist. That’s honest. But guess what? These checks are often spent within the first year or they are simply deferred spending accounts versus creating equity and enterprise value. I have taken a check before and believe me, it is such a big difference to create equity and enterprise value rather than to just settle for an upfront check that is quickly spent and taxed and then I’m bound to the firm for the next decade or so.
MINDY DIAMOND: I’m guessing there’s not much you can't do for clients today?
MICHELLE SMITH: I can do anything. We can pay bills. We can do their taxes. We can really create a family office environment for people. We can report on 401(k)’s, we can track deferred comp such as restricted stock units and stock options. We can do it because the technology available for the independent RIA space is phenomenal.
MINDY DIAMOND: What’s next for Source Financial Advisors? What is it going to look like five years, ten years from now? What do you suspect the end game looks like for you?
MICHELLE SMITH: Five years from now I want to double in size. I want to hire quality advisors that fit this specialty mode; those who would benefit from the platform we’ve created, the branding we’re able to offer and be able to further leverage our Dynasty relationship. In ten years I will be 58 years old. I would love nothing more than to have some sort of a monetization event where a big company takes a stake in us but still keeps us as Source Financial Advisors. This would be a game changer in this industry and would confirm my belief that the generalist model is a dead one.
MINDY DIAMOND: How do you spend most of your time now? Does the heavy lifting of running the business and getting your hands dirty take up most of your time?
MICHELLE SMITH: No. It’s more of a joke than anything. I hire people to do things. We have incredible people here from my assistant all the way to the President and COO, who happens to be one of my best friends. No, my day looks like a typical business owner’s day. It’s strategy. It’s planning. It’s some managerial work and some financial advising. It is controlled chaos but with a very strategic underpinning.
MINDY DIAMOND: Got it. Last question, finish this sentence: The best thing about being independent is . . .?
MICHELLE SMITH: Control. Total and complete control. It’s beyond exhilarating!