The teams, led by Leo Kelly in Maryland and Joel Guth in Ohio, say the Chicago roll-up 'has its own agenda' but that it served as a good stepping stone to becoming fully independent RIAs

July 7, 2017 — 9:16 PM UTC by Lisa Shidler

5 Comments

Brooke's Note: HighTower just absorbed the fiercest body blow in its brief nine-year history. Still, the breakaway of two teams and $3 billion of assets over the 4th of July weekend was wholly devoid of one characteristic aspect of wirehouse breakaways --  blindsiding. HighTower saw this one coming and simply stood there and took it. But foreknowledge at least yielded actionable information about why these teams were leaving. In short, both teams just want to be big RIAs with all the flexibility, pride of ownership, fatter profit margins and better chances to build equity that comes with it. HighTower's own actions increasingly reflect that RIA orientation. Its dealmaking is virtually all in the RIA realm either as an owner or as a servicer. And so while this article is about a pure zero-sum loss, maybe there is a gain in HighTower's going into it with eyes wide open. But what's going to happen to all those "partners" on the wirehouse-like side, they'd starting to look obsolete in shape and dim in prospects as an IPO slips further into the future -- especially after these exits. See: With a reminiscent fire, Elliot Weissbluth personally leads a new charge to buy RIAs.

HighTower Advisors suffered the worst day in its history on June 30 as two teams in two states with a combined $3 billion of managed assets slipped out from under its umbrella with very similar messages about why they wanted out so soon after joining.

The Chicago-based roll-up bid adieu to Joel Guth, 47, who left Hightower along with his 11-person team forming RIA Gryphon Financial Partners Group, which manages nearly $1 billion in assets. He's in the same office as before in Columbus, Ohio. Guth was not a partner in HighTower, but rather he used the firm's platform, and his assets were under HighTower's RIA.

Perhaps even more painful was the departure of Leo Kelly, 48, with a 21-person team that was dubbed Kelly Wealth Management under HighTower. His team managed about $2 billion in assets, and his new RIA is Verdence Capital Advisors and he is in his same office in Hunt Valley, Md. He was a partner at HighTower. See: HighTower Advisors shows its breadth of appeal by nabbing a 25-year RIA veteran with Moss Adams DNA.

"Losing larger advisors is never a good feeling," says John Furey of Advisor Growth Strategies of Phoenix, stating an obvious but weighty fact. Still, if misery loves company, HighTower can take solace.  "I think it’s natural and normal for teams to transition away after being at a firm like Hightower for several years.  As Hightower has evolved, they will not be perfect for everybody." See: HighTower picks up $6.4-billion roll-up on the cheap but the valuation may reflect WealthTrust's stagnant growth and profitability.

'Agenda' clash

Both Kelly and Guth say that HighTower's business model was hindering them in achieving their objectives.

"As HighTower grows, it has an agenda and a business strategy of its own and we have an agenda and a business strategy of our own," Kelly says. "We wanted to be able to grow exactly the way we wanted. It's a natural evolution."

Joel Guth: Once we lived in the independent channel for three years, we got an understanding of everything and we realized we didn't need a partner anymore.

Still, this talk of evolution varies from the original business model that called for HighTower advisors to become equity-owning partners en route to an initial public offering that would enrich them even more than building equity in an RIA.

Kelly declined to comment on his equity ownership. He says he did not sell his firm to HighTower but as a partner, he gained equity in the firm. HighTower wins a $700 million Merrill Lynch advisor in Maryland horse country and wrests an LA-based IAR from an RIA.

A recruiter who asked not to be named says Kelly likely just walked away from his equity and that it may not have much if any, value.  

Kelly says the prospect of an IPO -- or lack thereof -- didn't play into his decision to break away.

"I hope their equity is wildly successful and as we break open our RIA, we have our own equity and our equity has value. The primary difference is we'll control our own destiny in terms of equity. Every client we make and every decision we make has an impact on our company and our equity." See: HighTower passes up $40 million capital raise, takes a big breather from deals and implements a pacing regimen.

Approaching $50 billion

A HighTower spokeswoman said no one was available to speak for this story. But the firm sent out a release July 6 with the headline: "HighTower, On Track to Smash Previous Growth Records, Adds High-Profile Talent to Corporate Team."

In the release, HighTower boasted of 21 transactions in the first six months of the year bringing aboard $10 billion in client assets and that its total client assets now approach $50 billion. The bulk of those assets came in a single controversial deal -- the purchase of a roll-up in WealthTrust that has been struggling for years to add net new assets. HighTower picks up $6.4-billion roll-up on the cheap but the valuation may reflect WealthTrust's stagnant growth and profitability

The firm's most recent ADV lists $30 billion of assets, which includes the nearly $3 billion in combined assets of Guth and Kelly's firms. Both of those firms and the assets will be absent from HighTower's 2018 ADV.

Elliot Weissbluth hit an unprecedented trade media hype peak around 2012 but some advisors who captivated enough to sign contracts back then are now choosing to leave.

"We believe in challenging the status quo. We believe that the industry does not well serve the needs of financial advisors and their clients and that we can do it better," said HighTower CEO Elliot Weissbluth in a statement.

Yet Guth found that HighTower had grown too big to cater to his specific needs.

"When you’re part of a bigger organization, they've got to run it more broadly and we wanted flexibility to customize our offering and tailor it to our clients," he says. 

Guth and Kelly aren't the first to leave HighTower. In 2016, Paul Pagnato, David Karp and 23 other team members left HighTower with $2.5 billion of AUA to form their own RIA, PagnatoKarp. After chats with Phyllis Borzi, a flagship HighTower team executes a 'deliberate' breakaway to form a $2.5-billion RIA

HighTower as halfway house?

Mike Papedis, founder and managing partner of Fusion Financial Partners based in San Diego and former managing partner at HighTower, declined to comment specifically about the recent defections but pointed to platforms of quasi-independence like HighTower as transition stations on the way to filing an ADV with the SEC to create an independent RIA.

“Advisor movement isn’t unusual,” Papedis says. “Some wirehouse teams operating for the first time in an independent space engage in various platforms to help them detach before they form their own ADV. These platforms can provide critical infrastructure for the team starting day one and then as the businesses mature, the advisors can be better informed and may decide it makes more sense to form their own RIA and set up an ADV.”

Papedis adds: “I’m currently working with several independent advisors with their own planned departures from platform providers." See: HighTower parts ways with -- and doesn't replace -- the dealmaker who has 'worked on more breakaway transactions ... than anyone in the industry'.

Forming their own independent RIAs wasn't hard for Guth and Kelly because neither firm was ever acquired by HighTower, both advisors say. Although their departures came on the same day both advisors’ decisions were independent of one another.

Guth and Kelly are mostly sticking with the same custodians. Guth's firm will still hold assets with Fidelity Clearing & Custody Solutions and Schwab Advisor Services.  Kelly's firm will still hold assets with Fidelity, Schwab and some smaller banks as well.

Matt Sonnen: These RIAs are realizing that they’re running their own businesses, and they find that out six months after signing up and say, 'Wait, why am I writing a check?’

Guth and Kelly say that making the move to independent RIAs now was easier after they had been with HighTower for a handful of years. Going straight from a wirehouse to their own RIA would have been a leap they weren't quite ready to make at the time. 

Good while it lasted

In 2014, Guth fully admits he wasn't prepared to go it completely alone.

"When you're getting ready to exit a brokerage environment, there's a lot you don't understand about the independent channel," he says. "Having a partner that understood the channel and could set up vendor relationships allowed us to focus on running the business and bringing clients over. Once we lived in the independent channel for three years, we got an understanding of everything and we realized we didn't need a partner anymore. But we needed the partner at the beginning." 

This is a common realization of breakaways to platforms of quasi-independence, according to Matt Sonnen, founder of PFI Advisors LLC in El Segundo, Calif., a firm that helps transition advisors out of roll-ups and into full independence.

“These RIAs are realizing that they’re running their own businesses, and they find that out six months after signing up and say, 'wait, why am I writing a check?’" he said in an earlier interview. “I bet my career on this.” See: How the mastermind of the Luminous Capital breakaway is parlaying his cloak-and-dagger skills into 'Pure Financial Independence’.

Despite their decisions to depart the firm, Kelly and Guth have positive things to say about HighTower  

Kelly joined in 2012 from Merrill Lynch.

"HighTower and I had a very amicable split and we've been talking about this for a year. We've been talking about how we see the future and our growth. HighTower gave us a chance to get out of the wirehouse and become independent and gave us the time to learn how to be independent."

He credits HighTower's support with help making the big jump from $700 million of AUM in 2012 to his firm's current $2 billion.

 But now, he's ready to build a national brand. See: Power Player: Larry Raffone is racing to 'lock up' the 401(k) market by taking its robo head start and combining it with a semi-national RIA.

Prison with no locks

For Guth, departing HighTower was a breeze compared with bolting from Morgan Stanley. 

“This was much easier than before," Guth says. "It was a friendly exit. When we left Morgan, it wasn’t friendly at all. It was more contentious. Hightower has been great and really helped us during the transition. It was really seamless. It was very easy and much easier than we thought it was going to be.” See: Why an elite Morgan Stanley Smith Barney advisor jumped ship and plans 10 offices around the globe.

Papedis acknowledges that leaving a firm like HighTower is much easier than leaving a wirehouse. “Unlike the breakaway from a wirehouse, it doesn’t have to be in the cover of darkness, these moves have been discussed and planned. I’d assume there is a lot of support both ways to make sure clients are taken care of,” Papedis says. See: How the mastermind of the Luminous Capital breakaway is parlaying his cloak-and-dagger skills into 'Pure Financial Independence.'

Another recruiter who asked not to be named says the stakes are much higher leaving a wirehouse because there are always brokers nearby who can call on your clients. HighTower, he says, couldn't really fight back even if it wanted to because it, in many instances, it has no geographical presence.

Guth and Kelly said they each separately spoke with HighTower executives about their departure for months. 

As advisors leave HighTower to create own brands, HighTower counters by hiring Jim Cramer sidekick Susan Krakower, as 'chief brand strategist.'

 

For Kelly, he is looking to build a big brand. "We want to build our brand nationally and we really want to customize our business and how we operate to our clients very specifically," Kelly says. 

New blood

Meanwhile, HighTower announced in a release that it hired George Fischer as managing director of operations and service and he has previously spent 10 years at E*TRADE where he ran wealth management and other divisions.

HighTower also hired Susan Krakower as chief brand strategist. Krakower spent a decade at CNBC where she created "Mad Money" with Jim Cramer.

The firm also hired Kyle Okimoto as strategic consultant. He was co-head of strategy and business development for Merrill Lynch Global Wealth Management. 

Kelly says his time with HighTower will be recalled fondly. "I'll look back on my decision to join HightTower was one of the best in my career. We didn't have a negative feeling about being a small fish in a big pond. Our DNA is entrepreneurial and we knew exactly what we wanted."

 


Mentioned in this article:

Advisor Growth Strategies, LLC
Consulting Firm
Top Executive: John Furey



Share your thoughts and opinions with the author or other readers.

Gravatar

FAA said:

July 8, 2017 — 12:26 AM UTC

What would one expect? None of these companies have sustainable business models...it's just shuffling deck chairs.
Gravatar

Jeff Spears said:

July 8, 2017 — 12:40 AM UTC

I've lived this hell. Platforms are nothing more than a half way house for the most successful practices. That coupled with the enduring DNA of breakaway advisors calls for a adjustment to the model. Hightower has made that adjustment but is left with many legacy "partners" who are counting the days until their loans mature.
Gravatar

FAA said:

July 8, 2017 — 1:04 AM UTC

Agree with the 'halfway house' reference- another term might be a 'liberation consultant'! Ha. My view would be (and I actually was involved- founder of one of these)- You help teams leave somewhere. You provide all the liberating stuff- set up the ADV, a little tech, interface with custodians, research etc. All that stuff! After a few years they realize they can do it themselves- they are not 'institutional clients of the street' they can get it themselves without paying some platform fee. If they are successful who needs the platform- if they are not successful why would the platform want them. In my view many of these firms just missed it- there was an opportunity but now it is too easy to replicate solo.
Gravatar

Stephen Winks said:

July 8, 2017 — 11:55 AM UTC

Like FinTech technology, roll-up RIAs are in the early stages of development. They afford invaluable scale and knowhow for neophyte RIAs yet as FinTech evolves simplifying and empowering ever more stronger and less expensive value propositions, the roll-ups are squeezed to provide more for less. Replicating the wirehouse business model is no longer good enough as individual RIAs have ambitions for expert fiduciary standing in advisory services which is beyond the scope of a roll-up as it entails fiduciary liability only a true RIA is willing to assume. This is the emergence of professional standing in advisory services which affords a preemptive value proposition at lower cost which is a powerful magnet for winning clients. It is the free market at work which forces roll-ups to chart a new course. Roll-ups must immerse themselves in a low cost, high service business model built around expert fiduciary standing that is an anathema to conventional brokerage. The economics are different from conventional brokerage but uniquely serve the best interest of the advisor and their clients. The difference is what is in the best interest of the investing public and professional standing. The independent RIA simply affords faster, better, cheaper expert services and is going where brokers fear to go. SCW
Gravatar

FAA said:

July 10, 2017 — 10:37 PM UTC

I agree Steve- roll ups/platforms have to stand for something but they don't. CapTrust has done a good job far as I can see. Rest of them are mired in the headline news, no real culture, no long term value proposition and ultimately no long term biz model. It's smores without the chocolate or marsh mellows...kind of empty! Well...it is summer so had to throw that puppy in!

Submit your comments: