Breakaway Brokers
It is human nature to wonder about the grass being greener on the other side of the fence. Some advisers may wonder what it would be like to hang up their own shingle, and those working for a major wirehouse or a regional broker/dealer (B/D) may secretly dream of breaking away. However, there are pros and cons to any business model.
Advisers more interested in freedom than money fueled the independent adviser movement, says Danny Sarch of Leitner Sarch Consultants in White Plains, New York.
With a freshly launched firm, Doug Prince is one of them. Working for seven years as an adviser with Stifel Nicolaus, a regional wirehouse in St. Louis, Missouri, Prince clearly distinguished himself and his practice, being awarded PLANSPONSOR Plan Adviser Team of the Year in 2010. He established his own firm, Praxis Fiduciary Advisors LLC, in mid-June 2012 and is now the advisory’s chief executive.
“There is a new energy with our team,” Prince says. “Even though we are doing the same thing, each individual’s contribution has a much bigger impact on our organization than it would within a 5,000-employee organization.”
Freedom
Praxis, in Carmel, Indiana, manages approximately $1.9 billion of retirement plan assets from midsize and large firms.
Prince says that, when he left Stifel, he dropped his Series 7 license, because, as an independent registered investment adviser (RIA), Praxis does not work on commission. From the client’s perspective, Prince says, it clears up “an organizational cloud of conflict,” and, from the firm’s point of view, “it makes organizational disclosure cleaner.”
For instance, when Praxis filed its ADV forms—used by investment advisers to register with the Securities and Exchange Commission (SEC), as well as state securities authorities—the forms related only to their own business. “The makeup of our clients lines up with who we are, and it’s not commingled with a lot of advisory teams the way it is at a larger organization.”
Praxis’ disclosure to the SEC is fairly specific and detailed concerning referral fees and all other sources of income, Prince says. Disclosure is cleaner because of these details, he believes. Being independent allows an adviser to openly embrace such full-disclosure values and culture, which he has found to be a strong selling point with clients. “Organizations are looking to hire us because [the disclosure] tells the story of our group and not a multicultural, blended organization,” he says.
Prince relishes the freedom independence can bring. Noting a request for proposal (RFP) that his group at Stifel Nicolaus was hired to fulfill, Prince says they had to exclude certain vendors because they were competitors. But, as an independent, fee-based adviser at Praxis, “We are not beholden to anyone. We can use anyone we deem acceptable for a client.”
Loyalty
Although Prince is still in the earlier stages of setting up his firm, he says his team has retained about 94% of its clients during the transition. “And we’re expecting that number to go up,” he says. “It really made us feel good about what we do. Being with a smaller organization, the clients feel like they’re part of our success. When we first set this up, we had some that were fighting to pay their bills first so theirs could be the first checks to come in. When we were part of a bigger organization, that affinity wasn’t there.”
Prince feels going independent has deepened the bond with his clients. As he meets with other entrepreneurs, he notes the level of connection and mutual respect among them. “They respect you for running your own business more than if you work for a big firm,” he says. It may not be spoken aloud, Prince says, but it is a feeling that comes across tangibly, in the way they answer questions.
“Working with retirement plan sponsors, we have other things to talk about now,” he says. “The things I didn’t have to deal with before are interesting to learn, but they’re also the same issues my clients have to deal with.”
Another advantage Prince failed to foresee in the planning stage was that he would have a firm with equity to use to attract and retain talent. “This equity can be used to help grow the business,” he says.
An independent company can react nimbly to opportunities—another unexpected bonus. A small business naturally has less red tape. He recalls adding a staff member without having to go through layers of bureaucracy.
In a big organization, overhead gets divvied up, Prince says. If there are 15 business lines, expenses are split among them. Not so at a smaller firm. “We focus on working with institutions and their retirement plans,” he says. “The overhead all goes to the advantage of our clients. It’s helping clients—not going to something they’re not going to use.”
Of course, even a dream scenario has its challenges. Prince notes that going independent means committing to all the nuts and bolts of running a business. “It’s a lot of work upfront because you don’t do that every day, but we’ve come through that. Your time does get eaten up by things you didn’t have to do before,” he says. Hiring an accounting firm and setting up a health care plan for staffers are among the myriad tasks necessary to keep the machinery humming.
Looking for a Change
From the other side, Ian Jones, based in Buffalo, New York, says that one reason for his decision to align with Morgan Stanley’s Graystone Consulting is the firm’s ability to provide Jones’ clients with far greater depth and range of manager due diligence than many independent consultants can offer. “Across the organization, there are approximately 190 individuals who devote their time [to] researching alternative and traditional managers, versus just a handful of people at some consultant shops,” says Jones, institutional consulting director at Graystone.
At the age of 50, Jones says, he was looking for a change. He did not want to spend the next 15 to 20 years at Marko Consulting, where he had been a consultant for more than a decade. “I have always been attracted to the idea of being an entrepreneur and wished to build and run my own business,” he says.
When Morgan Stanley Smith Barney and Graystone expressed interest in him, Jones recalls it took him a while to readjust his thinking, but he soon realized that the arrangement would allow him to work with a firm that has global reach from Buffalo, where he lives. His five-member team can service institutional clients with resources that allow them to build diversified portfolios with what Jones calls best-in-class compliance, as well as the accompanying reporting and monitoring.
Running his own business is important to Jones, and the structure of Graystone Consulting allows him both independence and the ability to interact with the other self-contained teams; there are, Jones says, more than 40 of them. His team can control decisions about their clients’ services while they are able to draw on the resources of Graystone and Morgan Stanley Smith Barney. “We’re operating just as we’ve always operated, but with much greater in-depth resources to draw on,” Jones says.
Pointing to today’s increasingly complex investment market, Jones says it can be difficult to perform adequate due diligence and research with a small junior research staff. “As discretionary management becomes a larger portion of our business, this depth of research is essential,” he stresses.
He found that, even though his group is affiliated with a larger organization, it is still, to a large extent, independent, and the key issues that inform an adviser’s practice are very much in play. “We are very entrepreneurial, and we live and die by the success of relationships we build with our clients,” Jones says.
The group accepts only cash fees and sells no proprietary products, which Joe Sammons, another Graystone consultant, says is the best way to clearly delineate between the firm and its consulting business and the parent firm, Morgan Stanley.
According to Sammons, there is a potential conflict if an adviser takes part in fee-sharing revenue. To minimize this, the firm designed its arrangements so that clients can custody anywhere they choose. Among Sammons’ large clients, for example, is a municipal pension plan sponsor with $1.5 billion in trusts, which custodies its assets at a bank in the Southwest.
The collaboration that can take place by working under the Graystone banner is a better model than sheer competition, according to Jones. The Jones Group combined with a group in Texas, becoming one team.
As much as possible, he says, they try to distance themselves from the brokerage or wirehouse side of the business and focus on advising. “We are very different from the retail-oriented teams,” Jones says, because a substantial percentage of their business is with institutional clients.
“I think what I did was a little unusual,” Jones says, “and I don’t know how many other people would do it without having the experience as well as the ability to bring relationships along.”
Advice from Advisers on the Move
When weighing the pros and cons of joining an organization, take time to assess any possible opportunities to extend your business, advises Joe Sammons, a consultant at Graystone Consulting.
He recommends networking with the other specialist advisers or teams when possible, looking for chances to share expertise, research and business development initiatives. “I have also found opportunities among Morgan Stanley’s 16,000 advisers outside of Graystone,” Sammons says. “This has helped extend my business in ways that might not have been as possible when I was an independent.”
Ian Jones, a consultant at Graystone, cautions that joining some firms may mean bracing yourself to counteract misconceptions and inaccuracies. “Many people believe Graystone Consulting clients have to use Morgan Stanley proprietary products and custody their assets at Morgan Stanley,” Jones says. “Those are myths. You also are likely to hear that independent managers on Morgan Stanley’s investment platform have to pay to play and Graystone consultants are restricted to using research from Morgan Stanley. This, too, is totally untrue.”
“If you are on the fence about where you wish to transition, be sure to compare the legal, compliance, risk management, operations and marketing support provided by different organizations,” advises Bob Mandel, director of Graystone Consulting. “These support services can make a big difference in a consultant’s practice and can vary widely from one organization to another.”
Doug Prince, chief executive of Praxis Fiduciary Advisors, has three pieces of advice: Plan ahead; prepare to be really busy; and mentally walk yourself through the process.
“I planned [my move] for about a year, and I wish I’d had more time,” Prince says. However, he says, it will never seem like there is enough time to plan all you would like to accomplish.
Speak to all your clients and delegate work to staff or others, he advises, so that some can focus on clients and others on the administrative duties. He also recommends using members of the team you are assembling or outsourcing tasks.
In Prince’s case, his transition took place over six months and had three phases. The first is right before through right after the actual date you leave, which for him, Prince estimates, lasted three months.
Next up, he says, is the phase where you get to normal. “We have to get our mindset out of transition and redefine normal,” he says. Prince is now defining daily routines, activities and areas of focus. “You’re back on the regular quarterly meeting, thinking about acquiring clients.” It is crucial to get to a stage where you are no longer shaping and striving, he cautioned. Otherwise, your stress level will remain too high for too long.
The third stage is the return to innovation. “Now we need to get back to thinking: ‘What can we do better for clients? How can we be more efficient internally?’” he says. This stage, of course, never ends.