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HighTower wins its first-ever existing RIA after offering the breakaway a new way to do business -- and a chat with David Pottruck

Three Bridge Wealth Advisors surpised itself by giving up its 'sweet' freedom to regain the advantages of scale

Friday, July 23, 2010 – 3:54 AM by Brooke Southall
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Brett Sharkey: Quite honestly, I was not interested in the idea at first. Look! We have done it; we are out [of Smith Barney]. That taste of freedom is sweet.

HighTower Advisors has nabbed its first-ever existing RIA, and the company has shifted these advisors firmly into its sights.

The big Chicago-based aggregator of breakaway wirehouse brokers has entered into a partnership with Three Bridge Wealth Advisors of Menlo Park, Calif.

The RIA consists of three ex-Smith Barney advisors: Brett Sharkey, 38, Eric Thurber, 40, and Fred Molfino, 41, who turned independent last August.

The three men advise $740-million of assets largely from clientele in the Silicon Valley venture capital community. See: Citigroup share plunge triggers elite Smith Barney team to consider breakaway.

Bigger and better

Sharkey says that he and his partners were pleased enough with what they were doing on their own. HighTower’s capabilities were simply bigger and better.

“We were nothing but impressed from the first minute on” he says. The platform was similar but “they did it bigger. We learned that they would enhance our lives – with more capabilities and efficiency.”

HighTower’s successful recruitment of Three Bridge represents an important shift for the firm. In the past, it had been focusing solely on luring big-time brokers straight out of the wirehouse community. See: HighTower doubles recruiting staff and seeks green pastures of Morgan Stanley Smith Barney brokers

“We think this is going to be the first of many [already-independent RIAs]. We’re in dialogue with a variety of prospects,” said Elliot Weissbluth, CEO of HighTower, which has 29 advisors advising about $17 billion in assets.

The company has been — for about a year — looking for “broke-away” brokers that recognize that they need “hybridized” infrastructure and would benefit from business services like legal, accounting, PR, marketing, operations and trading, Weissbluth adds.

By “hybridized” he is referring to the ability to serve advisors who derive revenues from both asset-based fees and commissions on transactions.

Challenges for HighTower

Dialogues aside, it may be difficult for HighTower to bring aboard more existing RIAs in the hyper-competitive market for large, successful practices, says Anthony Riotto, founding partner of Riotto & Jones LLC, a search and consulting firm for wealth managers in New York.

Once breakaways get a taste of freedom, it can be more difficult to convince them to become part of a larger institution again, he adds.

“I get what [HighTower] is saying [about how it could be attractive to already-independent RIAs]. It rings true. But it seems like [Three Bridge] has come their way for 15 different reasons,” Riotto says.

Brett Sharkey, managing director of Three Bridge, says that the idea of joining HighTower wasn’t attractive at first.

Sweet freedom

“Quite honestly, I wasn’t interested in the idea at first,” he says. “Look! We’ve done it; we’re out [of Smith Barney]. That taste of freedom is sweet.”

And Weissbluth allows that luring RIAs back into a larger organization has its challenges.

“Getting into another partnership is hard,” he says.

But running your own shop when you want to concentrate on advising clients can be harder.

“Many advisors are struggling” with independence several months after breaking away, he says. “You don’t really know [how difficult it can be] until you experience it.”

The trade-off in joining HighTower seemed acceptable as far as freedom goes, according to Sharkey. “We didn’t feel like we were giving a lot up.”

David Pottruck

The Three Bridge partners first came to that determination by sitting down in San Francisco with David Pottruck, the former co-CEO of The Charles Schwab Corp who is a big investor in HighTower. They liked what he had to say.

“It’s not just that he’s legendary in the business,” Sharkey says. “It’s [his attitude of]: Let’s build a great business.”

Sharkey adds: “He’s taking time out of his life. He doesn’t need a day job.”

After the Pottruck meeting, the Three Bridge principals flew to Chicago to get a fuller picture of HighTower, then proceeded from there.

HighTower executives didn’t have any conversations with Three Bridge’s principals prior to their breakaway.

Three Bridge will continue to use Schwab as its custodian for fee business and it will use HighTower for transactional business. HighTower has relationships with JPMorgan and National Financial Services for transactions.

Three Bridge already uses Black Diamond of Jacksonville, Fla. for portfolio accounting software, which is a company that HighTower is closely allied with.

Contract for services at first

The initial partnership formed between Three Bridge and HighTower is in the form of a contract for services and using the platform.

“We just changed the way that people can do business with us,” Weissbluth says.

Sharkey says that the new system is good because it allows his firm to leverage the HighTower platfom without delay. “There’s things we can implement right away and other things aren’t immediate-need kinds of things. We wanted to get going” before completing an equity partnership that is comparable to the other 16 firms.

The fact that the full deal hasn’t been wired is not an indication that the two companies are merely flirting with the idea of a deeper cross-ownership. See: Weissbluth lands war chest for HighTower Advisors [Updated]

“We don’t think of this as a test drive,” Weissbluth says. “We are all 100% committed to each other.”

Sharkey agreed.

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Jeff Spears

Jeff Spears

July 23, 2010 — 1:43 PM

This is a significant transaction that is a direct shot across the bow to United Capital and other consolidators. It also provides another good option for the large number of RIAs that are considering a merger.

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