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Merrill Lynch breakaway runs gauntlet to set up his business

'I was just a constant work machine'

Friday, November 20, 2009 – 6:23 AM by Elizabeth MacBride
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Share your breakaway story: email elizabeth@riabiz.com

This is the first in an occasional series of columns called Breakaway Stories – narratives about the drama that comes along with the decision to go into business on your own, as an entrepreneurial RIA. Why did you make the leap? What were the funniest moments in your journey? What were the toughest? When did you know that your business was going to fly? If you have a breakaway story to tell, please e-mail Elizabeth MacBride at Elizabeth@riabiz.com.

Soon after Ryan Payne set up an independent RIA in the Tribeca neighborhood of Manhattan, he got his hands on a letter from Merrill Lynch. That letter, with a few particular lines highlighted, is still hanging up on his office wall.

It was the summer of 2008, and he’d been working crazily, 70 or 80 hours a week, as he tried to get his business up and running. He had decided to break away from a successful 8-year-old practice at Merrill Lynch to go into business – but he knew that the success of his new business would depend on persuading as many Merrill clients as possible that they should follow him.

Of course, at the same time, Merrill Lynch was reaching out to those same clients, trying to convince them not to join Payne Capital Management.

The letter Merrill sent to his clients was persuasive, inviting clients in to talk about investment options.

The handwritten signature at the bottom was a woman’s.
The typed signature at the bottom was a man’s.

Apparently, Merrill had sent a letter signed by the new manager, over the typewritten name of a former manager. (Merrill didn’t return a call for comment).

Payne highlighted the mistake and hung the letter up. It spurred him to get through those first months, to establish a practice where the care of clients was greater.

Experts say the work of establishing an RIA is overwhelming in the first few months.

“It takes about six months to get to a new norm,” says John Furey, principal of Phoenix, Ariz.-based Advisor Growth Strategies, who aids breakaway brokers with the transition. For some people, it’s more like a year, he says.

Frank Pizzichillo, director of business development for Englewood, N.J.-based MarketCounsel, says when he sits down with potential breakaways, he tells them the work is divided into two halves: on one side, there are the tasks associated with moving clients over and taking care of their assets. On the other are the tasks that come along with any small business, like signing a lease, hiring staff and a multitude of other small tasks, like establishing an Employer Identification Number.

People that are more process oriented are apt to do better, Furey observes. Right away, they realized the need to set up everything from a system to open accounts to a template for client reviews. “Some advisors get so focused on the minutia, it really hurts them.”

As a sophisticated industry grows up around the breakaway process, it’s easier to find people to help. Furey, formerly the director of strategic business development for Schwab, went into business about six months ago as a sort of temporary chief operating officer for new breakaways. Hiring him costs a little more than the annualized salary for a COO, he says.

Payne did seek out such sophisticated services, though he did a lot of legwork to decide on a model. Jumping to another wirehouse would be more of the same: he didn’t like a compensation structure that could potentially punish him for doing what he thought was the right thing — like moving clients into a cash position when he thought the market might tank. He looked at the hybrid platforms offered by broker-dealers, but they seemed to him like “being a little big pregnant.”

He liked the pure RIA model because it was more lucrative in the long run and it allowed him the greatest amount of freedom to design investment strategies. He picked Fidelity as his custodian, and then, on a Friday afternoon, resigned.

To help him set up shop, he hired an assistant for the long-term and an intern to help with the work for the short-term. “I was the old man at 31,” he jokes.

Luckily, he had friends with office space in Tribeca. They leased him an unused portion of their office, including use of the conference room. Seeking sustenance in the long hours of work, he often found himself at a nearby deli, ordering “The Manhattan,” a fat sandwich with chicken, mozzarella cheese, tomato sos and jalapeno peppers.

At times, he wondered why he’d made the decision to put himself through so much work.

Not all of his clients came over right away. He remembers calling one, in particular.

“We really haven’t been making much money lately,” said the client in response to Payne’s pitch to join his new firm.

Payne, who had moved much of his client’s money to cash before the market crash, snapped back: “If you didn’t have me, you would have lost half your net worth.”

“Good point,” the client said, and agreed to move his assets to the new firm.

Eventually, about 95% of his clients followed and the firm has about $150 million of assets under management. Payne is now enjoying the more relaxed life of an RIA.

“The biggest difference is that I wear jeans and a T-shirt to the office,” he says. He’s also cut down on his consumption of Manhattan sandwiches.

“I’m in much better shape now,” he says.

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