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This MBA chose an RIA, now with $1.4 billion AUM, but as a business model, not as professional choice per se

Neal Simon says that -- Ric Edelman aside -- nobody is plotting expansion like him

Friday, February 14, 2014 – 5:26 PM by Steve Garmhausen
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Neal Simon: We decided to put our money where our mouth was and we hired a full-time [recruitment] person.

Most advisors learn to run their business by, well, running their business. Neal Simon, on the other hand, had the luxury of running, or helping to run, three businesses before launching Highline Wealth Management in 2002.

Simon, the 45-year old chief executive and founder, has built a 26-person Rockville, Md.-based RIA serving 200 wealthy clients. Highline manages $1.4 billion of assets and counting and is aiming for $5 billion of assets within five years, partly through adding advisors—whether tuck-ins RIA acquisitions or wirehouse lift-outs, Simon says. The business closed two deals toward the end of 2013 for a total of five. It’s now on the hunt for additional practices in the $100 million to $500 million range. See: Bob Veres’ vision: Scalable, multi-partner RIA firms will be profitable and powerful enough to beat the wirehouses.

As the assets grow, Highline’s profit margin will widen thanks to economies of scale and a centralized approach to pretty much everything. “It does not make sense to have 10,000 different research departments at RIAs around the country; it doesn’t make a lot of se*NS*e to have 10,000 different compliance departments,” Simon says. “And I think people are starting to understand that.” See: Why Joe Duran believes that classic RIA firms face extinction.

MBA cred

Most of Highline’s people are at its headquarters in Rockville and it has small offices in New York and Philadelphia. All told, there are four managing directors, six directors, four associates, one advisor on alternative investments, six analysts and five administrative and operations professionals.

Simon, who holds an MBA in economics from the University of Chicago, started his career as chief operating officer at William Kent International, a management-consulting firm. Later, he started and led USLAW Network, a national network of small law firms. Finally, he joined The Meltzer Group, a financial services company in Bethesda, Md., as president and chief operating officer.

Along the way he learned about doing deals, economies of scale and all the intangibles of running a business. He spoke with us about putting all that business savvy to use at an RIA.

Shooting the moon

SG: Why did you get into the independent RIA business?

NS: I looked around at the different investment platforms out there and I wasn’t thrilled with anything I found except for the independent model. I fell in love with the independent RIA model and just decided to start a new business committed to the principles of being independent, being objective, being on the same side as the clients, using the best investment products you can without any hidden agendas or incentives.

There remains no RIA with large-scale brand recognition. We thought it was pretty open, we thought we could start a business and compete and build it. We’ve grown every year since we started.

SG: You say there remains no RIA with large-scale brand recognition. What about Ric Edelman?

NS: Ric has done a good job building his business and his brand. Still I do not think there are any RIAs with meaningful national, or even regional, brand recognition. The day will come, but we are not there yet. See: Ric Edelman is looking to add a $1-billion RIA elephant even as he unveils an online consumer strategy aimed at the chipmunks.

All crafts lifted

SG: So what’s your perspective on the industry as an advisor who’s also an accomplished business guy?

NS: I’m not a career wealth-management person, and I find sometimes that I look at our business differently than other RIAs look at their businesses. I want to do great work for our clients and that’s really important. I also view this as a business, and I want it to grow, and I want it to be more profitable, and I don’t think there’s anything wrong with that. I think growth is good; I think some people just want to serve their clients and they don’t think about it.

But for me, growth is important. It’s good for our clients, it enables us to have more resources to help them. It’s good for our staff; they see career opportunities for themselves, as we grow there’s more and more places for them to grow in to. And third, it’s good for the partners we take advantage of the economies of scale that make the business more profitable.

Regional focus

SG: What do you look for in the advisors you recruit?

NS: We need an average client size of at least $2 million, and our average as a firm is $7 million. Number two is we’re focused regionally—on D.C., Baltimore, Philly, New York. We might expand that a little bit north or south but that’s really our focus. In order to have a consistent client experience, we think it’s important to get together regularly—and that’s a lot easier if you’re near each other. Third, investment philosophies are important to us. We’re a real wealth management firm, we’re diversified investors, we’re not really interested in a single-product guy, or people who approach the world very differently than we do.

Lastly, but perhaps most importantly, is just a cultural fit. We have a culture where we’re pretty analytical, we’re pretty open-minded—we’re willing to look at new ideas, we’re not married forever to any one concept necessarily, and we’re looking for people who fit into that culture.


SG: What do advisors get from joining Highline?

NS: The advisors who have joined can leverage our infrastructure, we support them, not just with the reporting and the research and everything else, but we’ll apply resources to it. We’ll give them some staff to help them interact with the clients, to help do financial plans, so we free up their time. And if they want to use that time for business development, to grow their book of business, that’s great, and there’s certainly a big incentive to do that. We have one guy who joined and has used that time more for himself, to be with his family. One of my partners joined, and he likes being involved in the management of the so he’s become my main operational partner so he’s used some of his time for that. But in most cases they use it for business development.

SG: What’s wrong with electronic meetings, which would let you recruit outside the Northeast corridor?

NS: We believe that if you want to have one culture, you’ve got to be together sometimes. You don’t develop a culture over the phone or through Skype, you develop culture by being together, being with people and again it’s important to us to have that consistent client experience. Another way that manifests itself is the way we staff our clients. Every one of our advisors work with all the different client services people on various clients because we want to cross-pollinate the learning, so if I work with one associate on a client and that associate works with another one of the partners, they’re able to learn from each of us, and they’re able to say to me, hey, we have this other client where we’re doing this, and Gary was looking at it that way, and then I learned from my partners through the client service teams. And just making all that happen which is why we are near each other and get together periodically. See: Ken Fisher keeps expanding his $42 billion RIA empire despite UHNW head winds.

Centralized services

SG: Do you see missed opportunity in the industry as far as economies of scale?

NS: I just have this view that you have 10,000 RIAs out there, and almost all of them have their own research departments, almost all of them have their own compliance departments, they do their own performance reporting, or they’re sending them out even if they’re outsourcing it. They have their own administrative infrastructure and benefits programs. And we really believe in consolidating that, doing it once for the entire firm. So we send out our performance reports in a centralized way, we do our research in a centralized way and I think that’s where the industry’s going. I think you’re going to see some larger and larger RIAs [follow suit] as we move into the future. It just makes economic sense. And that’s part of what we’re trying to accomplish. See: How RIAs are becoming as complacent as wirehouses — and what it’ll take to snap out of it.

SG: What’s your profit margin?

NS: We don’t disclose our profit margins; we’re a private company. I will tell you they’ve gone up as we’ve gotten larger. https://www.riabiz.com/a/4996220430843904/the-one-thing-an-ria-must-understand-about-social-media

Tech picks

SG: Who are your main technology providers?

NS: For performance reporting, we had used Fortigent, LLC for years; probably a couple of years ago we switched to Tamarac . We’ve been happy with them, we find them very flexible, we like their billing module a lot compared to what we had before, and we think the performance reports you can produce are a little more attractive. The whole thing’s a little bit easier to use, so we’ve been happy with that.

We actually just switched CRM. We had used GoldMine for a long time, we just switched to Tamarac’s CRM, which is Microsoft-based. That’s good because it’s integrated with the performance reporting. See: VC-backed RIA CRM firm bursts onto the T3 scene looking to knock off Redtail, Salesforce etc..

We don’t use any rebalancing software, our clients on average have nine accounts and we manage them all as one big portfolio and almost all of the have unique where they have concentrated stock positions or they own a lot of real estate so we don’t own REITs or they have unrealized gains and so we’ve never been able to implement rebalancing software across the board. We do it client by client. See: One firm’s odyssey to upgrade its rebalancing system with Tamarac.

Four-pronged strategy

SG: What’s your growth strategy?

NS: We view ourselves as having a four-pronged strategy. Number one is client retention: We’ve retained 99.4% of our clients a year for the last five years. Number two is investment growth. We try hard to be smart investors and hopefully our investments grow, which grows our revenues. Three is organic growth: We tend to bring on $75 million to $100 million of new clients organically a year. And finally, an important part of our strategy is inorganic growth, recruiting new advisors. We’ve done that now five times and we decided to put our money where our mouth was and we hired a full-time [recruitment] person. We think we’re one of the only independent wealth management RIAs with someone dedicated to recruiting other advisors. The aggregators obviously have that. But no one like us, real practitioners, who are looking to bring on partners, has somebody like that as far as we know. See: What exactly the CEOs of HighTower, Focus Financial and Dynasty Financial revealed when they shared a stage in Las Vegas.

SG: In what ways did your business background prepared you for what you’re doing now?

NS: One is managing people and processes. Each one of those companies [I worked for] employed 50 to 150 people, and I just gained experience in everything from doing performance reviews to overseeing everything it takes to run a business. The second thing is that over the course of those business I’ve been involved in over 20 transactions. That’s really helped me a lot with recruiting advisors.

Sometimes recruiting an advisor is an acquisition and you’re merging an independent RIA into your business. Sometimes it’s just recruiting a new employee but being creative about how you structure the compensation package, which might involve equity. And I think my experience with a number of transactions has really helped me. I think it’s unique — I just don’t think there are a lot of people running RIAs who have been involved in a lot of transactions. See: Career Arbitrage: How independent advisors are gaining the upper hand over big corporations in the hiring game.

Thinking locally

SG: Any final observations about the industry from your perch as a relative newcomer?

NS: I believe we will see the emergence of large, regional wealth-management RIAs. It just makes a lot of se NS e. It does not make sense to have 10,000 different research departments around the country. It doesn’t make a lot of se*NS*e to have 10,000 difference compliance departments at RIAs. And I think people are starting to understand that. We’re seeing more companies come together, you’re seeing more RIAs successfully recruit advisors out of the wirehouses. And we feel like we can be one of those companies. I think we’re going to see RIAs with $10 billion, $20 billion, $50 billion. And real regional wealth management RIAs, not just consolidators having different offices doing different things, but real companies, with consistent investment philosophies. See: Bob Veres’ vision: Scalable, multi-partner RIA firms will be profitable and powerful enough to beat the wirehouses.

SG: There have been some not very successful attempts to develop a national RIA brand. Do you think the answer might be regional brands?

NS: I think it starts regionally, I think you have to have a company succeed regionally before it can be national. I think there’s a natural way for companies to grow, and I think having three offices that are each a thousand miles apart isn’t a natural way to grow. I think companies are going to have greater chances of success if they grow incrementally and that probably starts regionally. It’s just easier to control the culture and the client experience.

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