Companies as diverse as First Union, Vestmark, Schwab, Goldman Sachs, [now] Accenture and Sciens Capital have fingerprints on this fast-riser

September 28, 2010 — 4:20 AM UTC by Brooke Southall

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Brooke’s Note: Yesterday’s article about why Dick Smith is taking his assets from SEI for Schwab left a couple of questions unanswered — especially with regard to the technology company he chose: Adhesion Wealth Advisor Solutions. Who are these guys? And is there reason believe that they can continue their string of success against the elite names in technology and TAMPs? By talking to more RIAs and more deeply researching the company, this article gets to the answers of those questions.

Adhesion Wealth Advisors Solutions isn’t the best-known of the turnkey asset managers or portfolio accounting providers serving RIAs. In fact, for the early years of its existence, the Charlotte, N.C.-based firm focused on Wall Street’s elite.

Adhesion was founded in 1999 as a stealth dot-com start-up by First Union bank. Its early customers included companies like Brown Brothers Harriman, Wachovia [which swallowed First Union] and JPMorgan Private Bank.

But about seven years ago – after majority ownership shifted to a New York-based private equity group — the company zeroed in the RIA space. It now serves 75 firms with a combined $13 billion of assets. Adhesion’s RIA clients have assets ranging from $50 million of AUM to $3.5 billion.

The company has benefited from a close relationship with Focus Financial, the big aggregator, which refers its partners to it. Adhesion also gets substantial referrals from the institutional sales teams of TD Ameritrade and Schwab Advisor Services, says Michael Stier, chief executive officer. A recent Focus referral resulted in a deal with Delphi Private advisors. See: A Harvard lawyer, a Columbia MBA and an engineer break away from AllianceBernstein private client unit to form an RIA

Accenture, Goldman Sachs background

The person behind much of the company’s evolution and growth is Stier, who was hired early on from Bank of America. Stier had previously headed the technology effort for Goldman Sachs’ Capital Markets Group. Before that he helped Wall Street firms address technology needs as an Anderson Consulting [now Accenture] consultant.

Stier survived the sale of the majority interest of the company from Wachovia [which acquired First Union in 2001] to Sciens Capital Partners of New York. This private equity firm fills three of four board members seats at Adhesion, with Stier holding the other. Sciens, which has former McKinsey consultants on staff, has made 50 investments in a portfolio of companies with an aggregate value of $2 billion.

Stier helped lead the shift in late 2004 to exclusively to serving RIA firms.

“Coming from big banks, I wasn’t crazy about having big banks for customers,” he says. “And we were getting unsolicited inquiries from RIAs. RIAs needed a turnkey solution and the more we looked at it, the more we got excited.”

In the past five years, Adhesion, which has 20 employees, has signed a host of big-time RIAs. Those firms have some common characteristics.

In each case, the advisory firm was caught between wanting to build a better wealth management system — by starting with Advent, PortfolioCenter or Black Diamond and then adding on other capabilities — and wanting to leverage the power that TAMPs and unified managed accounts bring to scaling a business efficiently.

Six staff analysts

Take Peter Needham. He went looking for a new portfolio management system for his RIA firm about 18 months ago. He wasn’t about to look at the usual suspects again. They didn’t allow him to rebalance accounts efficiently, drive down costs or apply the research of his six staff analysts.

The executive vice president of Watchung, N.J.-based American Economic Planning Group had tried Schwab PortfolioCenter from 2004 to 2009 in combination with iRebal and he had previously used Advent Axys. [Switching to Adhesion only took only a weekend for AEP because Adhesion’s software is built around PortfolioCenter.]

Needham, whose firm manages $450 million of assets [and oversees an additional $200 million of 401(k) assets as a fiduciary], wasn’t able to accomplish all that he wanted with these products. This time he vetted companies that provide a wider range of services, including FolioDynamics, Fortigent, Envestnet and Parametrics.

He went with Adhesion because he wanted to create his own model portfolios and then additionally have it work harmoniously billing, tax-loss harvesting and rebalancing that come with UMA technology. It also saved money. “It’s very cost effective and our profit margins have increased.”

What pleased Needham was that his company was able to outsource work that would have required hiring the “equivalent of three to six people,” he says. In addition, his company was able to use the research of its six fund analysts and apply it to its investment process but still get the infrastructure of UMA.

Pinging Schwab

Its rebalancing process was simplified, too. “Before we would be pinging Schwab with a large number of trades; now Adhesion is doing one big trade so we’ve created a tremendous amount of scale.”

Adhesion’s rebalancing capability got a big boost two years ago when it outsourced its UMA function to VestMark. The software was more expensive than its predecessor but Stier made the switch after the former provider was sold twice in quick succession to Checkfree APL and then to Fiserv. “The [predecessor] technology wasn’t as capable when we used it, and all these acquisitions made it too risky a proposition to even try to stick with it,” Stier says.

Rebalancing is especially intense in a UMA environment, he adds. There are multiple portfolios in a UMA and they all need to rebalanced, both within themselves and then relative to each other — like when the account drifts off the target allocation due to market fluctuations or when a change is made to the overall allocation for the account. The complexity increases when the tax impact of these activities is weighed against adherence to model and allocation weightings.

With these complexities in mind, Brent Morse also recently signed on with Adhesion. He founded Glen Allen, Va.,-based Morse Capital, which manages $400 million, by spinning off from Cary Street Partners in January 2008. Cary Street is a regional wealth advisory and investment banking firm that had 30 employees. Cary Street had been using Black Diamond Performance reporting during the 18 months before Morse left the firm.

He decided he needed to find technology that worked effectively with hybrid RIAs and that could easily incorporate UMAs.

“When I was looking at the marketplace, I was really looking for somebody who would work with me so it was important they had more services and capabilities than mere performance reporting – in UMA strategies and a larger network of managers at reduced prices.”

For an advisor also using Adhesion for investment management and UMAs, Adhesion’s overlay portfolio management fee averages .15% to .18%. These fees include reporting services for clients accounts enrolled in UMAs. Needham says that his prices come in at about 1.3% to 1.5% of assets under management, which includes the amount paid to Adhesion and the underlying fund managers.

This pricing is competitive considering that this is an average fee for a mutual fund and that the clients gets so much more under the Adhesion system of risk management, including billing, reporting, tax management and investing, Needham adds.

Bundling and unbundling

This desire shown by RIAs for more bundling of technology in some places and more unbundling in others is shifting the competitive landscape, according to Spenser Segal, CEO of Actifi in Minneapolis.

“The lines are beginning to blur between an Adhesion, Curian, SEI or Russell. As technology advances, there’ll be a larger range of variables that you can turn on and off.” SEI of Oaks, Pa, Curian Capital of Denver, Colo.. and Russell Investments of Seattle are TAMPs.

Morse liked Adhesion better among the choices.

“I was looking for someone who really understood the business,” he says. “I’m very impressed with them and their willingness to work.”

Stier says his company works particularly hard to customize solutions for companies, which — because it’s time-consuming — has also been an inhibitor of rapid growth. Still, Adhesion is in the process of adding two sales people, which will bring its staff to 22.

Test of time

Needham says that Adhesion is also passing the test of time.

“Overall, we’ve been extremely pleased with Adhesion. Sometimes when you get to know a provider, you see a darker side. That has not been the case.”

No people referenced


Mentioned in this article:

Vestmark
Portfolio Management System, Tech: Other, Trading/Rebalancing
Top Executive: John Lunny



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