News, Vision & Voice for the Advisory Community
Pastor saw how badly scuffed Wall Street was, so he founded Capstone, installed ex-wirehouse luminaries and is offering the rank-and-file big perks and equity up and down the line
October 15, 2013 — 4:04 AM UTC by Steve Garmhausen
Brooke’s Note: This is a rollicking story and Q&A of how a 2012 breakaway-to-LPL has broken out to become a mini Sandy Weill whose venture has a market cap of, not making this up, more than $350 million. Read on.
There’s a legendary story about how the late Steve Jobs lured then-PepsiCo president John Sculley to become CEO of Apple back in the early 1980s. “Do you want to sell sugared water for the rest of your life,” Jobs asked Sculley, “or do you want to come with me and change the world?” Sculley, of course, went on to head Apple for a decade.
Sculley isn’t the only one to turn down a career in soft drinks for something less fizzy and more meaningful. Darin Pastor, scion of the family owned Pepsi-Cola Buffalo Bottling Corp., decided there was more excitement — and money — in the financial services business.
Pastor entered the financial field as a mortgage broker in 1996, and went on to a broker gig at First Union (which later merged with Wachovia), then ran JPMorgan Chase & Co.'s Southern California retail market before becoming a managing director at Prudential Financial Inc. In September 2012, Pastor found what seemed to be his calling, as an independent advisor in Irvine, Calif., affiliated with LPL Financial. See: LPL bags a big Ameriprise advisor-under-RIA after CFA pursuit 'opened my eyes’.
But shortly after setting up shop, Pastor realized that his firm’s business model with easy-to-sell investments, equity stakes and a fat reimbursement for MBA and JD tuition—was recruiting catnip. So he shifted course once again, this time becoming a full-on aggregator.
Pastor is just 42, but he sits atop a publicly traded, mini-financial empire in Capstone Financial Group Inc. (OTC: CAPP) that has a market capitalization of about $385 million and the shares are up more than 5000% in the past month. See: Why exactly a $1-billion LPL advisor thinks he’s the guy to buy and turn around the Phoenix Coyotes.. The group, formed earlier this year, includes Capstone Investment Banking, Capstone Merchant Banking and Capstone Affluent Strategies, with $1.5 billion of assets under administration. Pastor sees the group growing from a combined 45 people now to more than 300 in five years.
Pastor claims he doesn’t have hobbies outside of business, but the truth is, he’s a rabid hockey fan. His father, Sydney Pastor, owned the minor-league Buffalo Bisons until the team’s demise in 1970, and Darin recently made headlines with his unsuccessful bid to buy the Phoenix Coyotes.
The National Hockey League has been mum about why it rejected Pastor’s May offer of $277.5 million to buy and keep the franchise in its Glendale, Ariz., home. Some have pinned the blame on NHL dysfunction, while others speculated that Pastor’s terms—a 15-year payment term and a clause that left the door open to relocation — were too much for the league to swallow.
Pastor took a couple of veiled shots at the league in our Q&A, below. But he saved his best uppercuts for competing roll-up firms that he says offer independence in name only. See: Why the term 'roll-up’ should stay in the RIA vocabulary.
Q: You’ve gone from Pepsi scion to financial-industry empire builder. First of all, why didn’t you stay in the family business?
A: My father and I decided that after three generations it was time to sell out. At that time Pepsi — and Coca Cola — were consolidating a lot of the independent franchisees and bottlers and that was the right time to do that. I ended up in 1996 getting into financial services, which I’d always been fascinated with. I could have obviously stayed in that business, but to be honest it wasn’t as financially rewarding as financial services can be if you have a strong work ethic.
Being at Pepsi, we were always dealing with our bankers. Whether it’s trying to update equipment, finance the equipment we had or acquisitions or even financing our receivables, finance was always involved. Financial services provided me with a backstage pass, a deep understanding of many different businesses. By providing financial advice, you start finding out about not only the business owners and their financial concerns but also the financial needs and concerns of the business.
Q: You had a stint in the mortgage business and then continued in the financial world with Chase and then Prudential. How did that lead to your getting into the financial advisor business?
A: I started selling mortgages because that was easier to understand. My graduation into [financial advisory] started with some money from the proceeds of the sale of the family business that I had decided to invest through a financial advisor. I knew the profits I could generate in the mortgage business for the service I was providing, but I wasn’t quite sure, based on the financial information I was getting from the advisor, that he was really giving me something valuable that separated my portfolio from everybody else’s portfolio. I was curious about what he was being paid for this very commoditized information he was giving me, something I could pick up on any newsstand. I said to him, “You show me what you’re going to make. I’ll start giving you my money.” I could not believe they were getting paid that kind of money for what I considered a very low level of advice.
Q: So that was the start of your advisor career. How did you end up going independent?
A: As a manager at Chase in New York and then after they acquired Washington Mutual, they had me run southern California for their investment division. I had some success there but noticed that [after the financial crisis[ the shine was taken off those iconoclastic names. We kind of lost the public’s trust. When I used to call people and say, “I’m with JPMorgan Chase,” people paid attention. When I called people and told them that after the financial collapse, people would hang up the phone or start blaming us for whatever was in the press that day, whether it had anything to do with my division or not. See: Seeing a clear path to $3 billion, Washington Wealth hitches its venture to LPL but quietly adds Schwab.
Brand equity, in my opinion, was at an all time low — and I understand the power of brand equity coming from a marketing background at Pepsi. I realized that customers are really looking for independent advice. I decided to launch Capstone so we wouldn’t be held to selling the house brand but actually doing our jobs as financial advisors.
Equity for everybody
Q: You shifted pretty quickly; you were an independent financial advisor and then within a year you had become a roll-up firm. Why the change in direction?
A: We were gaining ground through some of the ways we were recruiting. One of the ways was that everyone who works at Capstone is an owner of the company; even the administrative assistants have equity in the company. They are gifted ownership of the firm in substantial amounts. You’re creating a different kind of culture when you’re dealing with a business owner as opposed to an employee. You just tend to get a different level of service when they have skin in the game, I don’t care whether it’s a dry cleaner or financial services. See: How the Facebook IPO is creating the mother of all RIAs, Iconiq, and what an in-your-face it is for Wall Street.
The other reason why is when we started to see the way the recruits were responding to us, we found that we could grow faster by acquiring wealth management firms that basically had a similar kind of business model and the same value proposition that we value. The expertise we add is in operations. You have financial advisors out there who are great advisors and not great business operators or owners. We show them how to be better business owners, and they can also become equity owners in a much larger entity.
The independence mirage
Q: Why has Capstone been able to hold its own in the very competitive consolidation business?
A: The competition is fierce. The companies we compete against are much larger — huge conglomerates that are backed by private equity, that are backed by stock, that might be offshoots of larger multinationals. When you join these large companies, you essentially become an employee. They can call you a 1099, they may pay you as a 1099, but you are an employee of that company. See: LPL cannibalizes executive talent and launches mass-market entity.
That’s the difference between Capstone and everybody else on the Street. These large corporations can cloak themselves in independence, independence, independence — and nobody’s better at marketing than Wall Street — but in reality and in practice that’s not the case. Because they’re nickel-and-diming you on their technology and they’re overcharging you on your ticket costs. See: Smelling blood on Wall Street, genteel family offices are using the 'S’ word, study shows.
In addition, if you don’t do the paint-by-numbers approach that they tell you to do, you’re fired — like an employee. These guys are having their cake and eating it too: “Not only are we not going to provide you with benefits, because you’re 'independent,’ but we’re not going to provide you with anything, and you have to march to this drum and if you don’t, then we’re gonna throw you to the side.” I think people are finally realizing that they’re really not independent. Maybe they knew all along, but nobody wanted to call it out. Well we’re calling it out, and that’s why people are coming to us and not these big companies, which are often offering a lot of money upfront.
Clean technology niche
Q: So what’s the pitch to new advisor firms?
A: The bottom line is that they become owners on day one. They have substantial shares in the company. We’re small enough and nimble enough where that matters. There’s revenue sharing and we pick up all those incidental costs these other companies do not provide for — for example, office space, phone systems and technology. In addition we not only allow people to sell whatever they’re selling but we also have our investment banking capabilities that offer our proprietary products. These are something that are not being offered at those other companies because these other companies do not play in those spaces. This is a huge value-add to somebody who joins Capstone.
Q: Capstone also has investment and merchant banking under its umbrella. This is starting to look like vintage Sandy Weill. How do all the pieces fit? See: RIABiz goes to New York in search of RIA life in the land of investment banking giants.
A: With investment banking, we’re providing advisory services to small and midsize corporations, some of them public and some of them private. We’re also providing investment banking services where we’re providing short-term capital needs to these business operators. We provide capital to get them through their short-term needs, then we’re providing another stage of capital to retire that debt. We have a specialized expertise in what you’d call clean technology. That could be resource recovery, it could be solar; it’s fairly broad, we recently financed the needs of a company in Tucson, Ariz., called Instant Bioscan.
The final stage of investment banking is then probably going to the public markets, or equity if they stay private, probably in the form of preferred or common shares.
Merchant banking is where we buy a piece of the company, invest in the company that way, so that we participate in the growth of that company because we believe what they have is very unique. Somehow in the past 10 years, the line between investment banking and merchant banking got blurred. We are doing [traditional] merchant banking, where we actually line up alongside [a company] with our investment. See: In a Q&A, Todd Thomson explains why Wall Street’s glitter faded beside Dynasty opportunity.
Just as big, but different
Q: What’s the story with your tuition reimbursement?
A: Tuition reimbursement for MBA and for JD. Any employee at Capstone who wants to pursue their MBA or JD or both from a top-tier school, if they maintain a 3.0 average we will pay for 50% of their tuition. That is an added benefit where the compounding effects [will be] that we can look back five years from now and say we have, pound for pound, the most well-educated team in this particular space we’re competing in. That’s the goal and the mission behind that program. Now I know the programs at JPMorgan Chase and I know the programs at Prudential. because as a managing director and senior investment manager at these firms, I had to approve that stuff for the people who applied. There you might get 5% of your tuition paid, or if you’re lucky, 10% of your tuition paid if you’re incredibly talented.
Q: So it sounds like through the investment and merchant banking businesses you’re able to offer opportunities to your qualified advisory clients.
A: Now that we’re an acquisition company, our advisors are offering that, correct. Everything meets Rule 144 [requiring investors to be accredited]. RIAs as an entity are also covered under Rule 144.
Q: Do you also raise capital from outside the advisor entities?
Yes, we’re teamed up with other institutions, usually in a lead role. We’ve created syndicates. And we are working with some of the money center banks and also some of the larger investment banking firms on Wall Street.
Q: This sounds like a similar model to what you might find on Wall Street.
A: It’s similar from an investment banking standpoint. I guess where we’re different is the retail arm and our in-depth surgical understanding of investment banking. Our president and chief investment officer, George Schneider, has been doing this for the better part of four decades, so he heads up our merchant and investment banking efforts. His crackerjack team does thorough due diligence and looks for diamonds in the rough; we’re very selective on what we invest in. On the retail front we have some great people that have managed huge retail teams at some of the largest companies in the industry. For example, we have Bill Regan, who used to be my boss at JPMorgan Chase and is now the chief operations officer of Capstone Affluent Strategies.
Q: Why did you take the company public? And why did you recently split its stock?
A: We decided to go to the public markets because we thought it was the right vehicle for us for our acquisition strategy. We thought [public stock] was the best currency to trade as far as value. Some of our acquisitions are a mix of cash and stock, but we wanted that stock in there as an appreciating asset The stock split 20 to 1, and the split was to increase liquidity. That obviously helps investors and creates a more liquid market. We had around 4.5 million shares, and the 20-to-1 split created 90,200,000 shares.
Q: What kind of support do you provide your advisors?
A: We’re a 10,000-square-foot facility in Irvine and we have 10 other offices located throughout the country — all class A office space close to the financial centers of these communities. We have our phone systems and all the infrastructure any other organization would have, and that saves these independents money because we already have it built, and all they have to do is kind of plug and play. Some of these other entities call it 90% payouts, but then after they factor in all the help and technology costs and rent and insurance, they end up getting down into the 70% range.
Q: So what’s Capstone Affluent Strategies’ payout ratio?
A: 50% to 75% net of fees.
Sports ain’t banking
Q: OK, let’s turn to hockey. What did you learn from your recent bid to buy the Phoenix Coyotes?
A: A lot. I guess what I learned was to be patient through a process that sometimes doesn’t always make sense. In banking, the math tends to line up, that’s the nice thing about our business. Sports/entertainment is a very different animal. When you’re dealing with entertainment attorneys and stuff like that, their values might be a bit different than what a banker considers valuable. So there was a learning curve there — lesson learned. I also realized that just because you have the money and you provide the highest bid, doesn’t mean that somebody’s going to accept that.
That said, all of my focus and energy is centered around Capstone Financial Group, but the fierce competition that run through me will take another slapshot on the NHL’s net. See: A hockey star went from being a Merrill Lynch client to a Merrill Lynch advisor to the latest Merrill Lynch breakaway.
Mentioned in this article:
Top Executive: Bill Morrissey
Share your thoughts and opinions with the author or other readers.