What makes some of the biggest investment advisory firms in the country tick?
For Wealth Enhancement Group, the $1.2 billion firm
in Burnsville, Minn., it's about running their 95-person company like a
finely honed machine so they can absorb the $30 million in new money
they get each month. For Lee Financial in Dallas, it's about providing
very wealthy clients with world-class investment choices. At
RegentAtlantic, it's about harnessing their growing reputation to
become the go-to firm for attorneys in their northern New Jersey
neighborhood. And at RNC Genter Capital Management, it's about
providing institutional-level investment choices to individual
investors, including rock stars, entertainers and national sports
These firms' multifaceted strategies for building bigger, better, more profitable firms have created an enlightening primer for the rest of the industry. But while the advisory firms that make up the $1 billion-plus segment of the industry can be
relatively divergent in terms of how they do business, it's their assertive and strategic similarities that set them apart from their peers. Most have formalized management and marketing, along with standardized operating procedures, they operate against benchmarks, and they have made growth a real and measurable goal.
Lately, another similarity has included coping with growing pains-the kind that stem from adding millions of dollars every month to the portfolios they manage. But unlike other firms that have to keep reinventing themselves every few years when they become overwhelmed with growth, these businesses incorporate the management of growth into their existing business models.
"Independent advisors have stolen market share from wirehouses and regional broker-dealers for the past 11 years running, and there's no reason to think that won't continue," says Chip Roame, managing director of Tiburon Strategic Advisors, the Tiburon, Calif.-based financial services consulting firm.
There are far worse problems, of course, than growing pains. In fact, the 74 independent investment advisor firms managing $1 billion or more in client assets have been growing assets 20% annually for each of the past three years. Which means that the assets that this group of large advisors manages will hit the $232 billion mark by year-end, says Nicholas Stuller, managing director of Financial Information Group in Red Bank, N.J., which produces the Discovery Essential Databases on independent advisors.
The growth rate of these top firms is very visible to Deborah McWhinney, president of Schwab Institutional. Four years ago when she stepped into her current post, Schwab had one client, Ken Fisher of Woodland Hills, Calif., with more than $1 billion in assets under management. Today, it counts 30 advisory firms among its clients with $1 billion asset bases.
To find out what these firms are doing to be able to grow by leaps and bounds and still provide the kinds of services wealthy and sometimes very wealthy clients demand, we asked advisory executives and consultants from across the country how they're doing it. Here's what they told us.
How important is professional management? To be able to take on the $30 million in new money that is pouring into its coffers every month, the $1.2-billion Wealth Enhancement Group has created a highly efficient operation, run by a professional (nonadvisor) CEO whose job is to remake the firm into the efficient machine it's in the process of becoming. "We hired Jeff Dekko two years ago. He's known for taking companies our size and growing them big, which is what we're looking for," says Peg Webb, a senior vice president and partner at the firm. "It helps that he didn't know our business (although he has taken the exam to become CFP certified) because it helps him think outside of the advisor box and be more objective."
Dekko overhauled the firm's technology last year, a necessity for the kind of efficiency that will allow The Wealth Enhancement Group to hit its goal of doubling its assets in the next three years. Technology can also allow firms to grow without having to hire as aggressively.
Finding good people is as big a challenge for firms like Wealth Enhancement as it for smaller firms, even though it is willing to pay hard-charging, experienced professionals as much as $500,000 a year. Webb says that while the firm can find folks to hire, "We have a really hard time finding good people. Where are those hardworking, workaholic people willing to put in the hours and prove themselves?" she asks.
Standardized practices and defined departments and teams also help the firm grow without glitches-a key necessity considering this Midwestern shop caters to clients who have assets ranging from $300,000 to $700,000. That's in sharp contrast to the typical clients of the 74 "big" independent advisory firms in the industry, who have average account sizes of $2.8 million, according to Discovery Essential Databases.
There are 12 advisors in Wealth Enhancement's financial planning department. The firm also has investment planning, tax planning, estate planning, insurance, marketing, compliance and IT departments. The sharp segmentation allows professionals at the firm to maintain their focus and process clients and assets efficiently.
"As an advisor, I watch no money. My day is typically filled with meetings in front of five different clients. I'm face to face with people eight to ten hours a day," says Webb. "It helps that I don't have to worry about making the appointments, since our marketing department sets all appointments with new and existing clients. They fill my calendar."
So does the weekly business radio program the firm's partners have been doing for the past ten years, which reaches more than 500,000 listeners.
So far, the payoff has been significant. The firm grossed $16 million in revenues last year and expects to pull in $20 million this year. That means salaries in the $500,000 to $1 million range for the 12 advisors and partners at the firm, Webb says. "While we're still ahead of the game in terms of profitability, we do feel downward pressure. That's why the whole focus of 2005 is creating greater efficiencies."
Down in Texas, Dallas-based Lee Financial Corporation, helmed by investment virtuoso Richie Lee, is seeing competition heat up. The firm manages or oversees $1.5 billion for about 100 high-net-worth clients, many of them entrepreneurs. The average client brings between $6 million and $10 million in investable assets to the firm, but some clients are significantly bigger.
So far, Lee vanquishes most competitors because of his innovative investment strategies and long track record. "Forty percent of our investments are in alternative strategies, and it's been that way for 30 years," Lee says. "We created a fund of funds 15 years ago and use different hedge fund managers, both long and short, who are excellent stock pickers. We also use private equity and debt and arbitrage funds. We made a meaningful investment in distressed debt and energy when the market was down, and it's really paid off for us."
"There's always someone else clients are looking at when they have $4 million or more to invest, but one of the reasons we don't see more of it is because our clients are happy and we have an excellent referral base," Lee says.
To be sure, Lee runs a nimble ship with a staff of 40. But he also admits that he's going to have to "professionalize" certain functions at the firm that have done well up to this point without full-time devotion-especially if he intends to hit his growth and profitability targets in the years to come. "We're trying to grow the top line by 15% to 20% this year, but absolutely, profitability has gotten more challenging," he admits.
Hiring a marketing director might be one of those full-time necessities soon. Lee Financial is the only firm we talked to that does not have a formal marketing director, much less a dedicated department. "We're going to have to bring professionalization to marketing, as we have with other areas, but frankly I think this task has gotten away from many firms because it hasn't been critical. Referrals and new clients have been plentiful," Lee says. "But we will hire a marketing director one day."
The greatest challenges for his firm right now, Lee says, is managing growth and finding good, qualified people who fit the culture of his firm. "Our concern right now is we're growing as fast as we can grow and still delivering services at the level we're expected by clients to deliver them," he explains.
Finding good employees isn't as difficult, he says, as making sure they fit his firm and are placed in the right job. To do that, he's established a human resources department that is charged with recruiting new professionals on an ongoing basis. "To the extent you can't attract, retain and manage the right folks, you're a dead duck these days," Lee says.
Making sure that everyone works in lockstep when it comes to marketing and growing the firm is underscored frequently at $1.05 billion, Chatham, N.J.-based RegentAtlantic. The firm's six partners hired a marketing manager four years ago to underscore their commitment to their marketing program.
Consultants agree with this approach. "I think the thing that helps most firms grow big is they define specific sales and marketing approaches, whether it's networking or using the Charles Schwab referral program," says Tiburon's Roame.
RegentAtlantic utilizes these approaches and more. In fact, says the firm's Director of Business Development Margaret Prentice, "We've spent the last four years building a marketing culture and knowing that everyone is responsible for cultivating relationships that yield referrals. It's in each person's job description. We meet each month as a group to check on the headway each of us is making. Each person is evaluated and incented on how well they do originating referrals and closing them."
RegentAtlantic also constantly reaches out to leading tax and estate planning attorneys in the area, so that it's on the definitive short list of referrals they make to high-net-worth clients in need of a financial advisor. How? The firm hosts a monthly catered breakfast, complete with speaker, to which it invites significant attorneys.
To ensure its efficiency and investment prowess keeps pace with its promises, the firm also invests heavily in technology and new opportunities for clients. "We've spent $250,000 in the past 12 months on technology enhancements alone," says Christopher J. Cordaro, a partner and wealth manager at the firm.
RegentAtlantic also uses its reputation and the leverage its client portfolio affords to negotiate with custodians, service providers and even partners on clients' behalf. In addition to offering a hedge fund, the firm's partners convinced Morgan Stanley to tinker with its international real estate fund so that it now invests across Asia and Europe. The firm also partnered with three other advisor shops to create iRebal, a software program that rebalances investments and does cash management and tax loss harvesting automatically (www.iRebal.com).
To ensure that wealth managers have time to be creative and detail-oriented, the firm hired a COO, Jennifer Papadopolo, who handles all day-to-day compliance and operations.
The chief challenge for the partners? Finding enough good staff to allow them to meet their goal of adding $100 million in new assets this year. "We've entered the mode where we're continually looking for staff," says Cordaro. RegentAtlantic retained a search firm two months ago to ensure finding talented advisors was a chief priority.
In his latest industry study (Back to the Future: The Continuing Evolution of the Financial Advisory Business), JP Morgan consultant Mark P. Hurley predicts that an employee shortage would hit large firms particularly hard. Cordaro admits it's true. "It takes about five years for an advisor to get good, and we just haven't put enough of them in the incubator," he says.
For RNC Genter Capital Management, which manages about $2.2 billion for entertainers, sports figures and institutions, growth is good. "All told, we're growing at about $400 million a year," says president and owner Dan Genter.
The problem is, that doesn't always translate into added profitability. "Cost structures are increasing for personnel and operations, and fees are staying flat or even coming down a little, at the same time we're required to provide a higher level of services," Genter says.
The solution? You have to have a constant commitment to human and overall capital expansion, Genter says. "The days of the highly profitable boutique firm with the folksy model will no longer work. The successful firm has to navigate its maturation process, be run by a professional staff and have corporate structures and reporting. They also have to have a collective mission and know their story and core competence."
The firm's story is its actively managed investment portfolios, including its core and blended dividend equities strategies and its actively managed municipal bond portfolio. "We've been able to take an institutional-level product and use it with our high-net-worth investors, so they get the customization and tax management they can't get in mutual funds."
When asked if he might be grooming the business to sell it, he says: "Been there, done that." He spruced up the business before it was sold to Bank of Austria back in 1991 and then ran it for seven years for them before buying it back in 1998. That taught Genter a thing or two about the importance of independence. "Now I want to control my own destiny and the destiny of my clients," he says.