As advisors continue to cut ties with the traditional wirehouses, opting instead to form their own independent practices, PAM talks to John Straus, CEO of newly-launched FallLine Securities, about creating the only hybrid broker-dealer platform to exclusively serve advisors of ultra-high-net-worth individuals (UHNWIs).
For the last decade, advisors seeking independence from the wirehouse environments have formed a mass exodus into the independent space. Although the movement is nothing new, the volume of advisors choosing independence over the traditional ‘big four’ investment banks is growing rapidly; research completed last year by Cerulli Associates shows that between 2007 and 2014, the number of independent financial advisors in the U.S increased from 36,000 to 47,000. That total is projected to reach 51,000 by 2017, and as the number of fleeing advisors grows, as does the level of support platforms designed to house these new entities.
However, for all of these newly-emancipated advisory teams and the many platforms which continue to announce themselves as a support mechanism for the quest of RIA freedom, one industry veteran unveiled a new system this month, which he says will fill a gaping hole in the market.
“Many of these broker-dealer platforms designed to assist these newly-formed independent practices offer tools that work across clients regardless of their net worth, and the clients that suffer are the wealthiest ones,” explains John Straus, Chairman, CEO and founding partner of the newly-launched FallLine Securities broker-dealer platform. “The only consistent thing about the needs of UHNWIs are those needs are inconsistent, and no one was specifically serving this market.”
Straus’ platform will target advisory teams working almost exclusively with UHNWIs with a net worth of at least $25m, and those which need a partner firm to help build both fee-based and transactional business. The firm won’t compete with the many platforms onboarding “twenty or so teams a year”, says Straus, but will instead focus on incorporating a select few practices with 75-150 clients, managing around $2-3bn each. FallLine Securities is aiming to onboard just two select but “sizeable” partners by the end of 2016, in a bid to stick to its promise of catering to its very carefully targeted audience.
“We want to create a very specific solution for UHNW clients – we’ll grow at a slower pace, but we will remain focused on what we set out to do,” explains Straus. “We’re looking at onboarding firms that want to break away from the wirehouses, as well as very large existing RIAs who want hybrid capabilities and a partner platform to work with.
“We’re in conversations with both of those – I don’t think the latter will be one of the first to sign up, but they will ultimately form a significant part of our selective platform. Our 10-year plan contemplates up to 40 advisor teams.”
Straus’s resume highlights his time in the industry which has led him to this position – stints as head of private wealth management at UBS Wealth Management Americas, chairman of UBS Private Bank Americas, and prior to that, head of private banking in the United States for both J.P. Morgan and Morgan Stanley, have afforded him decades of experience.
His mantra for FallLine Securities’ success is, “you can’t be everything to everyone”. “I wanted to select a specific demographic and serve them exceptionally well via purpose-built solutions, rather than offering a more mediocre service to every advisor out there,” he says. This mindset was built when Straus took on the challenging role of turning Morgan Stanley’s wealth management business around, from a loss-making enterprise to a business which tripled productivity among its advisors within six years.
“I spent the first year of that job in the basement trying to form a strategy, and interviewing every advisor there,” he recalls. “The strategy I came up with was - we’re not going to be everything to everyone – we need to have focus. We let some advisors go, hired some new ones, and moved away from competing with the other wirehouses with a very select group of only 200 or so advisors.”
It is this level of focus, says Straus, which differentiates FallLine Securities’ hybrid broker-dealer offering from its competitors.
“The challenge with the UHNW segment is that there aren’t as many clients, and simultaneously, not as many advisors servicing this space specifically. But a client with $50m in net worth will have a completely different conversation with an advisor than a client with $10m in net worth – it’s a completely different set of advice, tools and pricing.” The clients FallLine Securities’ advisors will deal with will have fortunes too large to spend in their lifetimes, and therefore cannot be advised in the same way a client needing to ensure his wealth can be carefully preserved over his retirement years. Another reason, Straus says, that this demographic needs to be advised so distinctly.
The UHNW segment often wants to access certain things the current set of providers “might not feel comfortable assisting with”, says Straus – for example, an UHNWI might want to buy a building outright, rather than invest in a real estate investment trust (REIT).
“These clients aren’t looking for packaged products,” he adds. “They’re not looking to invest $100k but sometimes $5m-$20m, and their advisor needs to be prepared for that.”
The Wire House Struggle
Twenty or 30 years ago, most financial advisors were equipped with a fairly simple set of tools to furnish their clients’ investments with; nowadays, thanks to an exploding population of ever-sophisticated UHNWIs, more personalized tools are being demanded.
“Traditional providers give advisors tools to use with all clients, which often caused friction when the client was outside the ‘typical’ box,” says Straus. “Now, clients are becoming more aware of the availability of these tools that meet their needs.”
In a bid to stay ahead of the growing competition, advisors have consistently moved into these emerging channels such as hybrid, independent broker-dealers and RIAs, and a huge share of the market which was once controlled by the wirehouses is now being dominated by new industry players.
“Client segmentation is paramount, and the issue many investment banks face is that they’re trying to service clients across the wealth spectrum; the model doesn’t lend itself to being nimble and flexible, and advisor teams can’t grow at these firms in a differentiated way,” Straus observes. “Once advisors near the end of their deal, they move on.”
Straus echoes the concern many have voiced about the wirehouses: that the economics rarely add up to a viable partnership.
“If a wirehouse has a 15% margin to pay an advisor three times 12-month revenue, that advisor has to stay for 20 years to break even – otherwise you don’t have the chance to recoup costs,” he explains. “I don’t see how these big firms can continue this way unless they show advisors they can help them progress. Advisors generally don’t feel much of an allegiance and continually move on – it’s not a strong business model.”
Client segmentation, along with unique products and procedures, might help the wire houses, but they’re ‘unwilling’ says Straus. “An average client might have $500,000 in net worth, but if a billionaire prospect shows interest in hiring that firm, they’re often unwilling to tell them that it wouldn’t be a suitable match. These policies are undisciplined to date, and it makes for a poor client and advisor experience.”
In tandem with the breakaway trend is the ongoing debate within the wealth management community over whether advisor’s fees should be based on commission, payable by fee-only, or through a hybrid structure.
Straus says FallLine will operate on a hybrid model in order to give maximum transparency and returns to the client.
“Obviously the best thing for the advisor is charging a fee for every task they complete for the client, but that seems like an unfair way to operate,” he says. “For example, why should a client pay an annual fee for an investment in a private equity deal of which the advisor has zero impact on the performance? It’s a closed-end, private vehicle and a one-off investment, so it doesn’t seem fair to the client that their advisor benefits”.
Conversely, an advisor might charge a client 20-40 basis points to manage a laddered municipal bond portfolio - but when that investment only yields 1.5% over a year, that becomes a significant portion of what the client earns, Straus points out. “A fee of 0.5% on each acquisition over 10 years, which would maybe add up to 5 basis points annually, might be a fairer alternative,” he suggests.
The fee debate will continue to play an important role in the formation of wealth management’s future, says Straus, but the hybrid model is likely to increase in popularity with clients. “Clients are becoming more aware of what they expect, and don’t want to pay for,” Straus says. “If you’re focusing on such a small segment of the marketplace, you can’t afford to alienate any potential clients.”