How a hybrid RIA with nearly $2 billion in assets claimed a 10,000 square-foot Smith Barney redoubt

Brooke’s Note: The comparisons just keep getting easier for an advisor weighing his or her options — and, for that matter, a client weighing where to move their account. Now RIAs are moving into vacated wirehouse bullpens where the fenestration, signage, furniture, square footage, layout — even the Google map for getting to Taco Bell — are the same. Which would you choose: an office with “INC Advisors” on the door or the identical space one floor up with Morgan Stanley stenciled on the pane? This wirehouse breakaway’s adventure in real estate is intended to give only one answer.

Rich Dragotta joined LPL Financial 11 years ago with a tiny office, one assistant and the sensation of vertigo that comes just before jumping onto a shaky raft from the deck of an aircraft carrier.

“I grew up on Wall Street and I was the poster boy for Wall Street,” says Dragotta who started at Merrill Lynch in 1991, stayed until 1999 and then went to Paine Webber, which then became UBS. See: Why one UBS advisor broke away even knowing that his former partner would keep the 401(k) assets.

In 2003, Dragotta broke away to independence under the LPL banner with a plan to co-opt and morph the retail financial advisory industry in greater Paramus, N.J. into something with minimized conflicts of interest, higher service levels and better opportunities for himself and the people who chose to work with him. See: A $2 billion, 69-year-old Merrill Lynch advisor passes up the gold watch in favor of breaking away.

Wall Street to Paramus

Rich Dragotta: I like the office
with the glass and mahogany and
the traditional bullpen.

Now, in a return to form — if not function — he and the 30 other advisors who work under the Independent Network of Consultants and Advisors brand are taking over a two-story, 10,000-square-foot office vacated by Morgan Stanley/Smith Barney located in the ultimate Jersey suburban shopping zone.

Built in 1981, the five-story Mack Cali Centre III, with its gleaming reflective glass exterior, is home to several Fortune 500 companies, according to its website, and features a seven-story atrium with an on-site cafe and outdoor seating areas. The building is adjacent to state routes 17 and 4 and Interstate Highway 80. It’s also adjacent to the Paramus Park Mall.

INC Advisors will move in the next month.

Wirehouse nostalgia

“The way I look at it, I was downtown on Wall Street at a big wirehouse all of my life and here I am returning to an office very similar to the one I knew,” says Dragotta, 46, who is principal at INC Advisors. “It’s a sign of the times. I’m growing at the expense of the other model.”

Of the nearly $2 billion of assets Dragotta’s firm manages, about half are fee-based and held under Boston, San Diego and Charlotte N.C.-based LPL’s corporate RIA. The other billion dollars of assets are commission-based. See: How LPL lured advisors from Raymond James, UBS and Ameriprise to its hybrid RIA platform.

“The sign is changing and the payout is changing,” he says. “When you’re in North Jersey, all of the advisors know one another and all of the offices are well known and have been here for decades. But to have this empty Smith Barney office felt like the glam of yesteryear. You’re either contracting or you’re growing. We’re growing and the wirehouses are contracting.”

The firm recently formed its own RIA, which has nearly $100 million in assets. Dragotta’s firm is the eighth-largest of the OSJs served by LPL. The largest is Private Advisor Group located in Morristown, N.J., 30 minutes down Rt. 80. See: How LPL’s biggest branch office added $3.5 billion this year by beating LPL itself with a key service.

Condensed, not withdrawn

New era: The faded Morgan Stanley
Smith Barney legend will be replaced.

Smith Barney vacated this spot after it merged with Morgan Stanley. Previously, each company had an office in the building. After the merger, the third-floor employees moved to the fifth floor. Morgan Stanley has another office in Paramus within a five-mile radius. See: Why an elite Morgan Stanley Smith Barney advisor jumped ship and plans 10 offices around the globe.

“We haven’t withdrawn from Paramus,” says Morgan Stanley spokesman Jim Wiggens. “We have quite a large office presence there. With the Smith Barney acquisition we frequently had multiple locations in a single city, and when leases have come due we have taken an opportunity to consolidate offices.”

Bullpen stays

Dragotta’s firm now takes up fourth and fifth floors. The Morgan Stanley office is one floor above them. Because of the configuration of the building, It now sits above Dragotta’s office but is still technically on the fifth floor.

The stately, wood-carved Morgan Stanley Smith Barney signage will be replaced but Dragotta is keeping the bullpen to preserve the wirehouse atmosphere.

“I’m trying not to change it much. I like the office with the glass and mahogany and the traditional bullpen. We’re just getting current with paint and paper. The physical office is unique. Most people think of a candy shop with independent advisors and that you’ve rented some small space and that’s not the case.”

The refurbished but still-elegant offices will be a boon to recruiting efforts, Dragotta says. It’s even possible he’ll recruit an advisor who worked in this very office for Smith Barney or Morgan Stanley back in the day.

The 10,000 square-foot office will be
spruced up but not transformed: 'We’re
just getting current with paint and
paper,’ says Dragotti.

“When I left the wirehouse world [such a thing] was unheard of. My vision was to create something that advisors like and with a comfort level and professionalism that they can deliver in the same way they could before. It’s the same feel and same look as a wirehouse. My passion is liberating a shackled wirehouse advisor. It’s where I came from and it’s what I know,” Dragotta says. See: Where Scott Leonard’s life stands after serving his RIA clients mostly from sea for 2 1/2 years, what cut his trip short and what was most unexpected.

Affluent vein

There used to be two Smith Barney branches in this office building run by two different managers after Shearson was acquired by Smith Barney, says Frank LaRosa, founder of Moorestown, N.J.-based Elite Recruiting & Consulting LLC. LaRosa previously worked for Smith Barney, overseeing a branch in Mount Laurel, N.J.

Paramus is the perfect spot for an advisory office because it is close to a nearby highway and the residents are affluent, LaRosa says. Indeed, it’s prosperous town; tolls from its booths on the Garden State Parkway alone generate more than $5 billion annually.

“That’s a really good area,” LaRosa says. “Every firm is right there.” See: Why the slow-evolving metro New York area is still on course to be the capital of the RIA business.

Super OSJ perks

In addition to the new digs, Dragotta hopes advisors will be attracted to the services he provides. He’s built up what LPL dubs a super OSJ, or Office of Supervisory Jurisdiction. That means he recruits advisors who join under his umbrella and he handles their compliance and paperwork. Dragotta’s OSJ also provides advisors with an administrative assistant to help deal with back-office issues including Social Security and benefits. See: LPL reaches hard-won agreement to rein in bonuses to big advisors that had proved to be overly generous.

And then there’s the payout, which Dragotta says is 90% or higher. See: Three MSSB brokers gravitate to a $4.5 billion LPL hybrid with a hefty RIA platform — and a sub-channel appears to be nearing critical mass.

Bill Morrissey: Rich began as a
sole producer and has grown to
become one of our top large
enterprises.

“He’s a great example of an extremely talented financial advisor who saw the advantages of independence but also understood the importance of partnering with a robust, full-service brokerage and advisory services firm,” writes Bill Morrissey, managing director of independent advisor services at LPL, in an e-mail. “Rich began as a sole producer and has grown to become one of our top large enterprises.” See: What Derek Bruton’s replacement may say about the departure that still has people shocked.

Productive partnership

For his part, Dragotta sees LPL as not only supportive but actively helpful despite its potential to compete for assets with non-OSJ LPL reps and to vie for the same wirehouse recruits. See: What LPL’s recruitment of a $2-billion beehive of NPC advisors says about its new sweet spot in the industry.

“I’ve never felt any distance,” he says. “Whether I’m lucky or fortunate, my attitude has always been as one of their big clients, they’d be silly not to work with me and they do. I’ve seen them put on programs and services that makes a bigger client like me even more competitive.”

As an example, Dragotta cites LPL’s dedicated service team, which has been a huge boost to his firm.

Dragotta also sees LPL working to lower costs, noting that ticket charges have been reduced since he started with the firm. See: LPL has a new high-margin, high accolade advisory platform but SAM’s sticking around.