Ensemble Financial reps were called into a room this past February to meet with the CEO of the firm, Tom Rogers.
Located in upstate Pittsford, N.Y., near Rochester, Ensemble is a small but profitable independent broker-dealer with 150 reps. About a dozen of the reps work out of the B-D's three-story headquarters at 179 Sullys Trail, and it was this group that was invited to the meeting.
"We were subletting from Ensemble and we were told we were going to meet to talk about our lease," recalls Bentley Hutchings, of Hutchings Financial Group.
What would happen next, Hutchings says, stunned him and the other reps in the room. "We were then told this meeting was not about our office lease, and that Ensemble was being dissolved," says Hutchings.
The reps were flabbergasted. "Every single one of us was shocked," says Hutchings.
Maybe they should not have been so surprised.
Ensemble was founded almost accidentally, molded in the image of its larger-than-life founder by evolutionary market forces. And just as natural events unfolding over many years inspired the evolution of this unusual B-D, it would be torn asunder by forces seemingly beyond the control of its creators.
At the Sullys Trail meeting and in other meetings between Ensemble's executives and its branches, the reps were told that its parent company had made a decision to exit the independent B-D business. While this came as a shock to the reps, the real kicker came when they were told that another B-D had been selected for them: INVEST. According to several reps at that meeting and others who had separate meetings with Ensemble executives, the switch to a broker-dealer focused on securities sales from banks was presented to them as a fait accompli.
"The needs of the advisors were simply not taken into account," says Leslie Strebel of the Strebel Planning Group in Ithaca, N.Y.
"This was not smartly done," says Steve Kane of Heritage Financial Services in Pittsford.
The story of Ensemble's undoing is a cautionary tale about how not to sell an independent broker-dealer. It's a story about the risks of the independent B-D business, the growing influence advisors can exert on independent B-Ds, and the inherent tension between B-Ds and reps. It's a story about how business decisions sometimes go awry.
Ensemble's history, according to its parent company's Web site, began in 1977, when Russell Achzet left the insurance business to start a financial planning firm, AM&M Planners Inc.
I've met Russ Achzet, and he's charismatic. Totally low key, Achzet has an easy way with people. In my brief encounter with him, Achzet made me feel special and I remember him as a warm, friendly and genuinely caring person. Achzet is also a pioneer. He began his career in the financial advice business in 1964 by selling insurance (it's not hard to imagine him being successful as a salesman), but he came to believe over time that his clients needed more than that. He became one of just a couple of hundred advisors in the nation to begin helping clients comprehensively in the 1970s-not just selling insurance or stocks but advising on the full spectrum of fiscal issues clients face and charging a fee annually for the advice. In the '70s, that was a revolutionary idea. The financial planning movement was in its infancy, and being a financial advisor still meant selling.
In 1977, Achzet founded AM&M, the parent company of Ensemble, to provide financial planning advice for a fee. Salaried advisors worked with AM&M clients through the RIA.
The firm flourished, so much so that in 1985 it established a broker-dealer. AM&M was thus one of the first "hybrids" offering both advice for a fee through an RIA and brokerage services through its own B-D. Achzet served wealthy clients in the Rochester area, capitalizing early on the burgeoning consumer preference to pay fees.
It wasn't expected, but CFPs and CPAs in the Rochester area began contacting AM&M to ask if they could affiliate with the firm. They, too, wanted to pursue the fee-based financial planning business model that was beginning to spread in the 1980s. Rochester thus became kind of an incubator for fee-based planning, one of a handful of pockets around the country where the financial planning business would take root.
In the 1980s and 1990s, as Achzet grew AM&M into a well-known financial planning firm in the Rochester area, the company forged in Achzet's image began to require professional management. In 1998, Thomas Rogers, a local CPA, was hired as AM&M's chief operating officer. It did not take long for Rogers to recognize that Achzet's comprehensive financial planning business had over the years naturally morphed into something much bigger. It was supporting about 35 financial advisors from the Rochester metropolitan area who had hung their securities licenses at AM&M and who were offering fee-based financial planning services.
According to Steve Wershing, who served as president of Ensemble from 2002 to 2010, Rogers recognized that the business of supporting other independent advisors had begun to demand more resources. It was no longer just a department at AM&M. Rogers, says Wershing, recommended that AM&M either dedicate a separate business unit to supporting independent advisors or exit the business. AM&M executives decided to enter the business of supporting advisors, and thus the idea for Ensemble was born.
According to Wershing, Rogers initially relied on AM&M managers to take the independent B-D to the next level. That plan soon changed, however.
Though about 35 independent advisors were already affiliated with Ensemble, he says, none of the executives at AM&M had experience in running an independent B-D. Wershing says he serendipitously met Rogers in 2002 and was recruited and hired to run its independent B-D operation. Over the next eight years, Wershing would play a central role in the development of AM&M's independent B-D operation.
I first met Wershing in 1998 when he was COO of Wall Street Financial Group, a small independent B-D in upstate New York. Over the years, we've become friends. To write this story, I avoided relying on his account of the facts. I interviewed advisors from Ensemble to get many different perspectives on the dissolution of their B-D. Nonetheless, Wershing's role in shaping Ensemble must be acknowledged as significant.
In 2004, Wershing, who reported to Rogers, officially launched Ensemble, for the first time establishing AM&M's independent B-D as a separate entity. "Once Ensemble had its own brand and established programs to allow independent advisors to outsource, we started to grow like crazy," says Wershing. By 2009, according to data from Investment News, Ensemble had $13.1 million in revenue and 150 reps, half of them fee-based.
"We became the biggest B-D in the Rochester metropolitan area, says Wershing, "bigger than Merrill or Smith Barney, and we eventually had reps in seven states."
In 2006, Ensemble's parent company, AM&M Financial Services Inc., was acquired by Tompkins Trustco Inc., a publicly traded financial services holding company headquartered in Ithaca. Tompkins owns three community banks: Tompkins Trust Company, The Bank of Castile and Mahopac National Bank, which together operate 45 branches in upstate New York.
Rogers was named CEO of AM&M Financial Services Inc., replacing Achzet, who remained vice chairman of the board. The independent B-D created almost accidentally by Achzet was now part of a bank holding company.
The purchase of AM&M by bankers would eventually lead to Ensemble's unraveling. The deal made Ensemble a stepchild within Tompkins. "It was a business we thought would be wise to exit on a strategic basis," says Jim Fulmer, vice chairman of Tompkins who was responsible for AM&M and Ensemble. "It did not line up well with us."
Fulmer says that when Tompkins bought AM&M, Ensemble was not the primary focus. Rather, it was AM&M's planning business. "We're now integrating AM&M's structure through Tompkins," says Fulmer. "Its trust and investment management services are now part of Tompkins."
Fulmer says margins in the independent B-D business are "thin" and "in sorting it all out, we decided it was best not to pursue that." The decision to spin off Ensemble was made a year ago, he says.
Anyone who is successful in business has made mistakes along the way. Sadly, people generally don't become successful without making a mistake or two. (Sadder still, I've made some doozies and success still eludes me.) So this account of Ensemble's implosion is not meant as a criticism of Tompkins or AM&M. Those involved-including Fulmer and Rogers-were gracious and professional when asked about the sale of Ensemble. But you have to wonder why this deal went so awry when it could have gone so well.
Tompkins cannot be faulted for exiting the independent B-D business. It's a bank. If the securities business is a mystery to many bankers, then the independent B-D business to them would be byzantine. Exiting a business you don't understand is always wise.
But why not maximize the value of a business you're spinning off? In this instance, the B-D could simply have gone to its reps and asked for their help in finding the two or three best matches among the large field of independent B-Ds.
The reps at Ensemble really liked the firm, and it was growing because of that. Brendan Jeffrey of Encompass Advisors Inc. and his partner Gary Castine came to Ensemble in 2007 from a family-owned B-D (they worked down the street) and they recruited three reps from their former B-D to join their branch at Ensemble in September 2009. Leslie and Paul Strebel, principals at the Strebel Planning Group, joined Ensemble 18 months after leaving a large independent B-D.
Ensemble was serving a growing niche of hybrid advisors-dually registered ones who hold securities sales licenses with FINRA but also work as RIAs or with RIAs registered with the states or the SEC. Ensemble was among a growing group of independent B-Ds catering to investment advisor representatives who own an RIA or those who derive most of their revenue from fees but do not want the hassle, liability and expense associated with creating and maintaining their own RIA.
Hybrid advisors like Strebel, Castine and Jeffrey want a B-D that will perform regulatory tasks required to maintain their securities licenses and retain the 20% of revenues they derive from commissions annually. But they want little else from the B-D.
Jeffrey, for example, says only 15% of his firm's revenues come from commissions and the rest of his firm's revenue goes through his firm's RIA, with 65% of his firm's advice delivered on a retainer basis. Strebel is similarly looking for a low-cost B-D specializing in supporting independent advisors that mainly get paid for their advice on a fee basis. "We joined 18 months ago because we were looking for a B-D with good technology and payouts and that would supervise us adequately but not be overbearing," says Leslie Strebel.
Ensemble delivered the right mix of services to this niche of advisors who wanted some support and a choice of additional services from their B-D on an a la carte basis-such as office space, secretarial services, portfolio performance reporting, insurance products, managed account solutions or a corporate RIA.
Several advisors interviewed credited Wershing with providing the right mix of choices. "Steve built a good team, and I thought he had built a good business at Ensemble," says Hutchings.
Wershing left Ensemble in April 2010, almost a year before its dissolution. Though I consider Wershing a friend, I've never felt comfortable asking him whether he was fired or quit, and I still don't know. What I do know is that Wershing and Rogers no longer got along. What exactly happened between them, I don't know, and it does not matter. The point of this story is not to lay blame. The point of this story is the bad result that could have been averted.
Ensemble's 150 reps scattered to numerous B-Ds-Commonwealth Financial Network, Cambridge Investment Research and LPL are among the names I've heard. Only a handful of reps are said to have followed the plan laid out by Rogers and gone with INVEST.
Reached by phone and asked about the sale, Rogers says, "It's not fair for me to comment on it because I'm not an employee anymore." Rogers left AM&M in late April and in mid-May began working as the COO at a Rochester real estate company.
"What was shocking was that [Ensemble] did not think through that we had options," says Hutchings. "They thought of us as employees who would just go along with whatever they decided."
INVEST is a B-D that specializes with advisors in banks. It may be trying to broaden beyond this niche to attract independent advisors and hybrid advisors, but it is not known for working with such professionals now. Calls to the press relations department at INVEST were not returned.
Hutchings says that if Ensemble had approached him and other Ensemble advisors and asked where all the reps could go, Tompkins would have had much more success in selling Ensemble. If Ensemble reps had been asked to help select a B-D and negotiate their deal, many if not most of the reps, especially the more successful ones, could have been wooed. The reps could have benefited from moving as a group and Tompkins could have reaped far more value from its purchase of AM&M.
"The deal they offered us was nothing close to what we could get in the marketplace," says Steve Kane of Heritage. "The combination of the grid, transition money, ongoing transaction and technology costs was not anything close to what we could get elsewhere. I don't know the inner workings, but they should have reached out to us before striking a deal."
Strebel's reaction in meeting personally with an Ensemble executive was more guttural. "I laughed at the guy, and I am not the kind of person to be disrespectful like that," she says.
Jeffrey, who says he has been in touch with 20 or 25 other Ensemble offices to coordinate his firm's search for a new B-D, says, "I don't think anyone I spoke with was very happy with the way Ensemble acted with us."
Says Hutchings, "They totally shot themselves in the foot. I can't blame INVEST, and they are probably a fine firm for advisors in their niche, but in the end only a small group of low producers is going to INVEST."
Editor-at-large Andrew Gluck, a veteran financial writer, owns Advisor Products Inc., a marketing technology company serving 1,800 advisory firms.