The vintage scales displayed in the conference room of Focus Financial Partners' midtown Manhattan offices are not the only collection CEO Rudy Adolf has his eye on. While he is unabashedly pleased with the varied and unusual instruments--most of which he claims to have found on eBay--he sees them as representative of the balance FFP maintains between the partnership and its client firms and the relationship between those firms and their own clients.
Now, after only three years building Focus into the leading partnership of independent wealth management firms in the country--a group that manages more than $30 billion in assets for an estimated 18,000 high-net-worth families, individuals, businesses and institutions--Adolf is ready for the next step: collecting only the best wirehouse brokers into the Focus fold.
It was mid-October when the trade press announced that a major team of Merrill Lynch brokers in Westport, Conn. had fled the coop. The four principals, who manage nearly $1 billion, were clearly not interested in hearing what Bank of America, Merrill's unexpectedly new owner, was going to offer one of their top producing offices. Instead, as LLBH Private Wealth Management Group, they established themselves as an independent registered investment advisor. A little over a month later, Focus announced that LLBH had become the first firm to sign with Focus Connections, a newly created concierge transition service for elite brokers--particularly those from wirehouses--who decide to go it alone.
"Connections," says Adolf, who was born, raised and educated in Austria, "offers emerging independent wealth managers an unprecedented support system and economic model that gives them liquidity based on their newly created equity." An interim COO will guide the new independents through the range of startup issues, from the mechanics of setting up shop to RIA best practices.
But Connections is not for every wirehouse brokerage team, Adolf points out. Among some 25 criteria that candidates must meet, the basics are those that reflect FFP's philosophy: a fee-based business, an entrepreneurial spirit, a growing client base and--oh yes, at least $400 million in AUM, what Adolf calls the "very small elite, the 1% [of brokers] who can stop being salespeople and become advisors."
"LLBH is a fantastic example," Adolf explains. "We had to make sure they would really fit. The more time we spent with the partners, and the more we got to know them, the more convinced we became." And Adolf knows exactly what to look for. Prior to forming FFP, he served as senior vice president and general manager of the American Express Global Brokerage and Banking division, overseeing 10,000 advisors managing more than $45 billion in assets. He also managed corporate-wide initiatives to attract high-net-worth clients and develop strategies for capturing a larger share of client assets. Immediately before that, he was SVP for Strategy and Business, reporting directly to American Express CEO Harvey Golub.
"I know both worlds, and the fundamental mindset between brokers and RIAs could not be more different," he says. "To work within the constraints of the 'mother ship,' you are held only to the suitability standard, meaning you can sell underperforming, overpriced products that may not be in the client's best interests but are manufactured by the mother ship. Our advisors have access to thousands of separate account programs. Focus doesn't manufacture anything. We can choose the best, products that are in the client's interest. And they are fiduciaries, paid on a fee basis with no other revenue source which creates that totally different mindset."
In his charming, middle-European accent, Adolf offers a simile: "The suitability world is your open heart surgery where you go to a doctor who is being paid to use certain products, as opposed to the fiduciary world where the surgeon will only select the best for you."
Running global brokerage for American Express made him more and more frustrated with the traditional brokerage models. "I simply believed," he adds," that this is the better way to do wealth management." In a recent interview with Adolf at his New York office, Wealth Manager couldn't help wondering:
Which came first--the chicken or the egg? Did the phenomenal disarray of the wirehouses prompt the creation of Focus Connections, or was this an existing idea whose time had come?
We had this in mind from the beginning. We always planned to attract the small elite of brokers to our models. But before we could work with that 1%, we had to work with our experienced partners and develop our unique business model.
Of course it's true that now because of the major challenges the big wirehouses are going through, trust in them has been eroded, the name has become a liability. For the last two years, every [wirehouse] broker has only apologized for who they work for. How long can a broker who really has the best interests of his clients in mind remain willing to do this?
That very small elite has, in effect, been making tax payments to their wirehouses and asking, "What am I getting for it? I have to apologize to my clients, work in a stifling compliance environment and use house brands." So now they're really looking, and our phone is ringing off the hook because people see our success in the traditional RIA space.
As for timing, with 70 million Baby Boomers coming into retirement, this is the first time in history that a generation of investors will be dependent on their portfolios. This is the time when the best possible advisor is your financial family doctor.
How does Focus Connections work?
First we help the firm through the design process. What do they want to build for their clients? The second step is helping them choose the right custodian. Remember, firms like LLBH have never had to deal with custodians before. Third is choosing the right technology platforms. Fourth is selecting the right compensation models, and fifth, we refer them to a network of law firms with very deep experience in the field. We also direct them to a compliance firm, although our partner firms are subject to [our own] annual audit.
Transitions can be done, but if they're done poorly it can destroy a practice. It's like a balancing act on a tightrope where you have someone who can stand nearby and spot you.
Do you envision Focus Connections as a sort of seed farm for Focus Financial Partners?
Obviously, we would not invest our resources in firms that we weren't hopeful would one day join Focus as a full partner. We've had an onslaught of interest lately, but we will remain very selective. This is not about doing a hundred deals; we don't want to tip the balance by very much. We've said "no" to many firms.
LLBH is reported to be taking 97% of their clients with them. Didn't client retention used to be a stumbling block when brokers left their firms?
We're a member of the protocol--and so is LLBH--which was established by Merrill Lynch, Smith Barney and UBS in 2004 and is administered by the law firm of Wachtell Lipton Rosen & Katz. It's a contract that lays out standards of how to deal with client data during a transition, and it allows clients to follow their advisors. It really protects the consumer. Before that, the wirehouses built up such major hurdles--even charging clients to leave--it made the transfer process so long that it was discouraging.
As a consolidator, FFP is becoming rather large itself. How is this an advantage to new and prospective partners?
It's not about size; it's about quality. Our agreements preclude us from taking over [a firm's] operations. It goes back to our unique business model. The sole liability remains with our partners. On the other hand, we are one of the biggest clients of the major custodians, so we have the benefits of expertise and bargaining power.
According to recent Equity Research from Citigroup Global Markets, "RIAs are the most powerful asset gathering source in the [financial services] industry." Do you think the trend can continue?
RIAs haven't just been winning in the last 10 to 15 years; they are going to outgrow brokerage firms. There is a Cerulli study which shows that over the six quarters ending with the second quarter of 2008, the top three RIA custodians brought in more net new assets than the top four full-service brokers. McKinsey and Company (for whom Adolf worked first in Munich and later in New York before joining American Express) has some deep analysis of why RIAs are so successful: They are giving their clients what they really want; they are being transparent. With the partial demise of the brokerage industry, people are realizing that they do have a choice.
Wirehouse brokers also have a choice. There are lots of independent operations like Commonwealth, National Financial and LPL out there looking to snag them, aren't there?
Same religion, different church. These types of firms attract a lower-end of brokers and still practice under the old model. Nobody else has our level of negotiating power...our expertise.
Nancy R. Mandell is managing editor of Wealth Manager.
