US Fiduciary offers a business model that is attracting ultra-high-end advisors who want to be fiduciaries.

Mary Ann Lambert did not have to be "sold" to move away from her comfortable, 27-year retail brokerage environment. A former Smith Barney advisor and wealth manager to ultra-high-net-worth clients, Lambert made going independent a priority on her agenda. But, until recently, she could not find the perfect fit for her practice, which also includes prestigious institutional accounts. She needed a way to seamlessly transition both retail and institutional clients, which meant continuing to work with most of her money managers, as well as a way to focus more on client development.
    She found the right fit at US Fiduciary. Last year she made the move to the firm's broker-dealer, USF Advisors, and heads its Philadelphia branch. "[Many] independent broker-dealers merely provide clearing services and not much else," argues Lambert. "US Fiduciary has integrated a broker-dealer with a high-end RIA practice and an advanced asset management platform. The US Fiduciary comprehensive open-architecture platform and technology, including an institutional-quality hedge fund offering, enable me to meet the increasingly complex needs of high-net-worth and institutional clients."
    At a time when many of the nation's largest brokerages are mobilizing vast resources in the nation's capital to avoid fiduciary responsibility, US Fiduciary is seeking to work only with those advisors willing to embrace that concept. This means that, unlike other colleagues at wirehouses, US Fiduciary-affiliated advisors won't have to tell the public that they may put their firms' own interests ahead of their clients'.
    Moreover, as Lambert's case illustrates, more people at giant institutions are looking to work with a broker-dealer or custodian that regards them as a professional advisor, not a salesperson peddling products. "We view Mary Ann as a true partner," says US Fiduciary Principal Elliot S. Weissbluth.
    The firm also provides advisors with concierge-style services to help smooth the transition. "We rented a space for her, provided the technology, and provided marketing and branding," says Weissbluth. "Two weeks after Mary Ann joined us, she closed a $17 million high-net-worth client. Recently, she closed a $3 million institutional client."

Lambert cited institutional-level consultants such as CRA Rogers Casey; strategists such as Frank Russell, Standard & Poor's and Frontier Asset Management; and prestigious hedge fund and private equity managers as major reasons for staking her claim at USF. The education, top-notch research and well-known technology through National Financial's Streetscape platform also added to winning her over.
    "The main thing US Fiduciary offers us are the upscale services we can't get from a general, typical independent platform or your standard independent broker-dealer," says Marc H. Pershan, executive vice president and director of private banking for New Century Bank in Chicago.

    Scott K. Davis, CEO and president of Addison Avenue Financial Advisors in Palo Alto, Calif., agrees with Pershan and adds,  "The research aspect, hedge fund and private equity components have been big for us, for our higher-net-worth clients." Davis' firm works with members of the Hewlett Packard and Agilent Credit Unions, among others.

According to US Fiduciary principal Scott A. MacKillop, "Many of Addison Avenue's advisors use the asset management platform for their clients, and they have become an excellent client of ours." In fact, Davis attributes the recent acquisition of a $2.2 million account to the state-of-the-art platform. "Our clients are really enjoying the reporting they're getting from the system," he explains. "We wouldn't have gotten that account if we hadn't had the front-end process provided by USF, as well as the product offerings."

Those are all the ingredients US Fiduciary principals Steven J. Graubart, MacKillop and Weissbluth used to build their new firm-a unique business model and a service platform for high-end independent advisors. "Let's pretend there are no walls," says MacKillop, divisional president of the new firm. "That way, we can bring elements in from the outside or create them ourselves and not have a bias one way or another-or feel everything has to be created here."

US Fiduciary also has some heavyweight investors behind it, including advisory board member Mayo A. Shattuck III, the former chairman of Deutsche Bank Alex.Brown. "I am involved with US Fiduciary because I have great respect for Steven Graubart as a businessman, an entrepreneur," he says. "I have confidence in his leadership skills and his ability to build a world-class financial services organization."

Today, Shattuck serves as chairman, president and chief executive officer of Baltimore-based Constellation Energy Group Inc. (a Fortune 500 company that owns energy-related businesses). He was intrigued by he firm because it "has become an advocate for the independent model in which advisors are free to serve their clients without potential conflicts and pressures to market proprietary products and services." 

Says Shattuck, "Given the challenges facing financial services professionals over the past few years, [the unique business model of USF], allows its advisors to maintain true independence and the ability to look our for their clients' best interests.

The foundation for the firm is a back-office managed account platform, a high-end consulting firm, an investment advisory firm offering a comprehensive mutual fund platform and strategically allocated model investment portfolios to RIAs, banks, trust companies, insurance companies, broker-dealers and CPA firms. US Fiduciary was organized through the acquisitions of four long-standing, diverse firms-Post Oak Capital Advisors Inc., Vista Analytics LLC, West Hills Asset Management and West Hills Institutional. Post Oak is a Houston-based advisory firm that was owned and is still run by Graubart's father. The two West Hills firms were owned by the late John Mansueto, the brother of Morningstar CEO Joe Mansueto, who died tragically of West Nile virus about two years ago.

Advisors can choose to register dually with the firm's boutique RIA, USF Advisors, and broker-dealer, USF Securities, or they can register with USF Securities and become their own RIA. A turnkey asset management program (TAMP) that includes separate account, hedge fund and private equity managers is also part of the picture.

The Structure

Founded in 2003, US Fiduciary has attracted 250 advisors on both the broker-dealer and RIA sides, and has another 70 brokers in the pipeline slated to bring in approximately $75 million more in revenue and about $13 billion more in assets. Currently, USF manages about $1 billion in assets and consults to another $1 billion or so, says MacKillop. This includes assets that were acquired through Vista Analytics, West Hills (institutional and asset management) and Post Oak Capital, as well as growth from new and existing independent advisors. Their consulting assets include the services they provide, i.e. asset allocation modeling and performance reporting, to firms that do not outsource the actual management of the assets.

"Our goal is to facilitate brokers in owning 100% of their business, help them be the fiduciary they want to be, and give them access to a genuinely open architecture enabling them to offer truly objective advice," says Graubart, who is also the firm's CEO.

USF management believes it is well-positioned to exploit the gap that exists between the independent broker-dealer and RIA universes. "We have a distinctive business model," says MacKillop, "that's different from the Schwabs and Fidelitys of the world." He thinks the gap in the business models of those firms, which ignores the large streams of revenues that brokers and advisors currently must sacrifice when going independent. "Even advisors in the wirehouses who are fee-based have a revenue trail that can be significant," he says.

Yet, USF can team with the likes of Schwab and Fidelity for brokers and advisors wishing to affiliate dually with a broker-dealer and an RIA platform other than USF Advisors. USF is custodian-neutral, according to MacKillop, and currently does business with major broker-dealers Schwab, Fidelity and Pershing, among others. He says, "It's the perfect solution for the high-end wirehouse advisor or broker who wants more control over his or her professional destiny and who wishes to 'own' the fiduciary obligation to his or her clients."

MacKillop goes on to explain the detailed structure of their firm and the various options available to brokers. "We work directly with Schwab, Fidelity and Pershing in providing services to our independent advisors who use our asset management platform," he says. "What makes our business model unique is the combination of services we provide through the various entities, [which] allows advisors the opportunity to work with us in the manner most appropriate for them."

Whether it is as unique as management thinks remains to be proven. Here are the options:
        Independent advisors can choose to access only their managed account platform (mutual funds, ETFs, separate account managers) and receive the associated services (reporting, training, billing, etc.).
        Commission-based broker-dealers (at wirehouses or at independent broker-dealers) can affiliate with their brokerage, keep that stream of income through their commission business and use the managed account platform for their fee-based business.
        Advisors can either choose to affiliate with US Fiduciary's RIA or form their own, while accessing their asset management platform and the associated services.

Says MacKillop, "In other words, they can form an entirely new entity and use our products and services or join our RIA and essentially become USF employees. They can continue to get all of the benefits that are applicable to their practices and still run their fee-based businesses through Schwab and Fidelity."

The firm, with offices in Houston, Chicago and Philadelphia, is basically an integrated financial services boutique and broker-dealer that provides independent advisors with innovative investment solutions, financial education and training, and other key support services. The open-architecture platform includes separately managed accounts, mutual funds, exchange-traded funds (ETFs) and alternative investments including hedge funds and private equity. And as its past acquisitions have shown, it is also willing to acquire advisory firms and perhaps emerge as one of the consolidators many observers expect to materialize in the next five years.

There are internally developed 'model' portfolios as well as access to outside leading portfolio strategists such as Frank Russell and S&P. Through its partnership with CRA Rogers Casey, USF offers research on managers, funds and other investment vehicles, as well as economic and market commentaries and training to keep advisors on the leading edge.

Thrown into the mix are account administration, portfolio accounting, model rebalancing, performance reporting and billing calculations to assist advisors who need back-office support, as well as help with regulatory and compliance issues.

The firm's principals have taken a cue from the way the separate accounts industry was formed in the late '70s and early '80s. In that era, innovative thinkers such as pioneers Jim Lockwood and John Ellis offered institutional managers (minimums too high for most retail investors) a way to capture conglomerate retail assets without taking on high-maintenance accounts. They made a deal with the managers, offering to manage the retail relationships for a fee and take over administration of the accounts in return for lower minimums from the managers.

USF has built a similar model with hedge fund managers. With their model, advisors can offer hedge funds to those clients who normally would not meet the minimum account requirements for certain well known and successful hedge fund managers. US Fiduciary screened managers to find the best, most consistent performers in the marketplace, and created a model. "We approached a number of the most sophisticated hedge fund-of-fund managers, with long track records and industry credibility," says Weissbluth, another divisional president and former executive at CRA Rogers Casey, "and said, 'Look, you don't want to deal with our average $250,000 client-you may even be unhappy with your own $2 million client. You'd probably like to have everyone at $5 million, right? Why don't you sell us access to one slot in your fund and we'll take care of all the legal, compliance, auditing and the very time-consuming client-service activities. We'll build a fund and hire you as a subadvisor. You'll then be able to consolidate all of your smaller investors, and we'll be able to take our fund out through our platform to advisors wanting to invest in smaller increments.'"

The fund-of-funds managers jumped at the opportunity to gather assets and outsource client service and regulatory responsibilities for investors with less than $5 million to invest. USF assumes client service, sales, compliance, legal and audit up to its level of compliance, and the hedge fund manager has a new institutional-level client-USF-who is low maintenance.

"It's an extremely compelling business proposition for some of these fund of funds managers. We're not competing with them, we have credibility going in and it makes sense economically," explains Weissbluth. As with the advent of SMAs, fees with hedge funds of funds managers have been negotiated down. Instead of the typical 1% and 15% of profits (a total of anywhere from 250 to 500 basis points, or bps), the fee is negotiated downward allowing the manager to layer on additional fees as a platform fee. The advisor can then layer his or her advisory fee, but the total fee to the client is still significantly below market due to both the removal of the performance fees and a reduction in the management fees at the fund-of-fund level. We took a fresh look at conditions in the marketplace, to see what is important to high-net-worth brokers and advisors," adds Weissbluth.

They conducted the analysis with  "a clean slate" and found that money, while important, was not the Number One or even the Number Two driving factor with high-level advisors when considering a move to another firm. "Having control over their own destiny, their clients and their work environment were themes high-end brokers and advisors found very attractive," he says. The second revelation was a high degree of interest in alternatives, spurring the unique hedge fund model described above.

The USF offering eliminates the filter imposed on manager access by the wirehouses, and allows advisors to continue to receive their stream of trailing income when they make the move to independence. "There is a desire on the part of high-level advisors for an environment that is the antithesis of a major wirehouse, but consistent with being independent. However, many do not have the skill set to simply walk out and start their own businesses," Weissbluth continues.

Technology
The NFS Streetscape platform allows stock, mutual fund and open orders to be entered from any Internet connection. Real-time quotes, research, real-time news updates and market data are available to clients on demand, along with monthly statements and 1099s with reporting features. Clients have personalized access from their PCs, handhelds or phones.
Account activity can be viewed as far back as inception. Advisors can create their own customized brand. Says MacKillop of the NFS platform, "As far as the platform goes, any advisor who clears through them will have access to those services within the offerings. We emphasize it, however, because brokers who are contemplating a move from a wirehouse will want to make sure that the offering is significant and they will be receiving everything to which they are already accustomed."

The Advisors

It's that flexibility that attracts the quality advisors USF wants. The "right" advisors for USF are willing to step up to the plate and admit, "Yes, I am a fiduciary," according to Graubart. "The irony is that every broker in this industry, every financial advisor, has a fiduciary duty," he explains. "It's all about accountability and core values." Advisors are viewed as partners in the firm and are encouraged to leverage the firm's resources as if they were their own.

Late last year, the firm attracted its newest senior managing director, Curtis Lyman Jr., to the South Florida region by opening an office in Palm Beach, Fla. Lyman, a 13-year veteran serving a high-net-worth practice, says,  "I was particularly attracted to the boutique culture of US Fiduciary," he adds. "Unlike the large national banks and brokerage firms trying to serve many markets and sell their products, US Fiduciary is focused on advisors like me who are interested in wealth management, not in selling products."

Transitioning

"Any transition is ugly," says New Century Bank's Pershan. Firms receiving transfer requests hold back securities and create other 'bumps in the road'; clients call, saying they're stilling getting statements with $33.46 on them. But USF gives us clear instructions-they didn't just hand us the paperwork and expect us to know what to do with it. So things like that get taken care of."

Lambert's practice involved a lot of third-party money managers. "We had some of the managers she was using already and we will continue to add managers to accommodate advisors who come from major wirehouses. There were four or five managers that she used who weren't on our platform, and we negotiated transactions with each of them so we could bring those assets across," says MacKillop.

USF is cognizant of the slippery slope of transitioning. "We're very respectful of the privacy act as we talk to prospective brokers and advisors who want to leave," says Graubart. "We don't want any information that is proprietary to the firm."

MacKillop agrees, and adds that USF wants to play by the rules all the way. "There are many wirehouse brokers who are eager to leave, and we don't need to step over the line and become overly aggressive about moving the process forward."

Veteran financial writer and former wealth manager Lisa Gray assisted with the research for this article.