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HighTower dangles array of hedge funds to lure breakaways

Wirehouses have nothing on independents when it comes to access to hedge funds, firm says citing three-year study

Thursday, June 23, 2011 – 2:39 PM by Lisa Shidler
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Elliot Weissbluth: I can tell [advisors] life is better for you outside of the wirehouse and I didn’t know this fact three years ago.

Brooke’s Note: HighTower Advisors is trying to do what no company has done before — create a repeatable process of picking off big wirehouse advisors and then turn them into a national wealth manager comprised of top-notch RIA practices. HighTower has momentum, expertise, capital, fearless lawyers and a target rich environment. Still, the task is not easy and the company realizes it will need to seize every opportunity to assure success. One thing advisors universally want is access to better investment managers. Here is the HighTower’s leader, Elliot Weissbluth, talking at yesterday’s Alternatives Strategies Conference about how hedge fund access may bolster his firms efforts to take recruiting from wirehouses to another level.

One of the nation’s fastest growing RIAs has sweetened the pot for breakaway brokers by proving there are dozens more hedge fund managers to pick from in the independent arena than at wirehouses. See: Step-by-step on finding a platform for alternative investments

On Wednesday, HighTower Advisors’ chief executive Elliot S. Weissbluth unveiled his firm’s three-year analysis backing up that claim. He spoke to some 600 attendees at the second annual Innovative Alternatives Strategies Conference which wrapped up at today Chicago’s Palmer House.

Aiming to woo top brokers with teams of $1 billion or more in assets, Weissbluth assured them that 80% of the time they’ll not only have access to the same hedge fund managers available at the wirehouses, but to many more as well. Hedge funds comprise approximately 7% of HighTower’s overall assets.

“We were pleasantly surprised that the hedge fund managers in the independent space would be an improvement for wirehouse brokers,” he says in an interview after his talk. “Now I have something to sell that’s based in fact and is material to the hedge fund part of the platform: I can tell [advisors] life is better for you outside of the wirehouse and I didn’t know this fact three years ago.”

HighTower of Chicago has nearly $20 billion in assets and 45 advisors.

Lengthy Research

HighTower initiated the comprehensive study after the firm reported hearing the same mantra wirehouse advisors: That they were reluctant to make the jump to independence without reassurance that they could still pick from top hedge fund managers.

It’s no surprise that this would be an important issue for Weissbluth, who previously served as director of marketing and research at RogersCasey, an investment research firm that manages a hedge fund.

Since 2008, Weissbluth’s firm has personally interviewed more than 500 advisors at all three wirehouses – Merrill Lynch, UBS and Morgan Stanley Smith Barney. See: HighTower wins big UBS team and clinches 'critical mass’

The effort showed that advisors in one wirehouse have access to 13 hedge funds and advisors in the independent arena can choose from nearly 50. On average, the wirehouses have access to around a dozen or so hedge fund managers, he said. HighTower’s advisors have access to about 50 through HighTower but, unlike at wirehouses, they can go directly to thousands more.

“We’re the first company mapping the horizon based on what we saw historically,” Weissbluth said. “We’re first to chart what is available and we’re still charting it. The future is uncertain but at least we know how the map looks today.”

In fact, because his firm hopes to use the analysis to bolster recruiting efforts, he acknowledges that he’s keeping some of the specific information guarded. For instance, HighTower has uncovered but will not disclose which wirehouse has access to which funds.
H2. Third-party solutions

The new breed of companies offering third-party solutions has made life easier for advisors, Weissbluth says. He points out that custodians like Charles Schwab Corp. have made it clear that they don’t want to offer hedge fund strategies.

And knowing he didn’t want to build its own platform, Weissbluth set about forging partnerships with third-party vendors. Luckily, he says there’s tremendous growth in this arena.

In fact, one of the biggest changes for advisors in the independent space is the recent emergence of third-party vendors offering hedge fund strategies to advisors.

Weissbluth declined to specifically name which firms HighTower has deals with currently, citing confidential contracts, but did name Altegris Investments, Central Park Group LLC, Envestnet Asset Management, Fortigent, LLC, Guggenheim Partners LLC and CAISfunds.

In some cases, these firms are screening hedge funds ahead of time for advisors. Some third-party vendors will make recommendations and others will remain neutral.

Weissbluth says it’s clear that asset managers are ramping up their efforts to work with RIAs, noting that 73% of asset managers are focusing their efforts on RIAs as their strategy for distributing alternatives in 2010.

RIA’s take on alternatives

There’s no question that for all of the hoopla about alternatives, they make up just a small portion of an RIA’s accounts. Even Weissbluth acknowledges that top advisors typically only have a small percentage of their portfolio in hedge funds. But that small percentage is an important one, involving as it does the advisor’s top clients.

For their part, advisors agree alternatives are important. Whether it’s hedge funds or hedging strategies, RIAs who attended this week’s conference say they feel it’s essential to offer an array of alternative strategies to clients.

For instance, about 25% of Richard Bregman’s clients’ assets are in alternative investments. Bregman is chief executive of MJB Asset Management, a New York-based RIA with about 100 clients managing about $100 million in assets. He says that clients feel comfortable knowing that strategies like hedging can help cushion their portfolio against market blows.

“This is another part of the whole picture,” he says. “There’s an opportunity for clients. It’s not really scary. These are underutilized, but they help people when turbulence hits the market to feel more comfortable.”

For more on this topic, see:

Buy alternative investments and get over Madoff, especially as interest rates threaten to rise: columnist

After a wait, Schwab has a program for alternative assets

The top 10 alternatives to alternative investments

Five steps to get your clients out of bonds and into alternative, low-volatility investments

The mention of CAISfunds was added after the article was originally published.

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Lisa Shidler

Lisa Shidler

June 23, 2011 — 3:56 PM

Hey Paul, That’s a great question. Eliott wouldn’t get into specifics of the costs, but did say the cost in the wirehouse arena is about the same as it would cost in the independent channel.

Paul Spitzer

Paul Spitzer

June 23, 2011 — 3:28 PM

Is there different pricing for the RIA channel? I always thought that a good percentage of the 2/20 approach went back to the B/D.

Paul Spitzer

Paul Spitzer

June 23, 2011 — 4:00 PM

So it sounds like it’s the same old 'pay to play’ arrangement that kicks back soft dollars to the B/D. It would be great to offer clients a solution without the conflicts of interest.

Paul Spitzer

Paul Spitzer

July 5, 2011 — 1:26 PM

Your comments are well thought out. I think A.I. is a reasonable asset class to consider having exposure to… my comment was more towards the lack of transparency regarding the fees. As an RIA I must try to find my client the best possible pricing available and it doesn’t appear the HT model is any different from a wirehouse offering.

Elmer Rich III

Elmer Rich III

July 1, 2011 — 4:27 PM

Interesting marketing case study. So: – 7% of assets of are in alternatives – Yet, a majority of the differentiation presentation is around access to what will likely be only < 10% of a client’s allocation and not anything close to a the core investments. So effectively 90% of the strategic differentiation presentation is based on < 10% of the AUM potential. A revised Pareto Principal (80/20).

We are going to propose that the logic behind this strategy is driven by: – Advisors client retention fears – The belief that alternatives are necessary for client retention – Because alternatives are mainly understood by clients, and perhaps advisors, as being a “safe” alternative to protect them from the recently experienced severe drops.

However, we have to consider these hard realities: – Alternatives are diverse kinds of investments – None are guaranteed to avoid losses, to the contrary – The only thing that goes up in a down market is correlations among investment vehicles

So are advisors serving themselves and their clients with a rush to alternatives or just reacting to recent traumatic experiences — like their clients? Worthwhile question to ask.

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