Banks buying financial advisor firms are often like dogs chasing cars-they don't know what to do with them once they get them.
On paper, the marriage between banks and advisory firms sounds like a winner. Advisors bring new clients into the fold and help banks diversify their operations with non-interest income, while banks enable advisors to expand their client service offerings and provide a platform for growth and succession planning. Successful unions between banks and advisors aren't uncommon, but the landscape is littered with enough rocky relationships plagued by culture clashes and failed synergies that it gives the concept a bad name.
First Western Financial Inc., a small bank and trust based in Denver, believes it's building a better model. Actually, it's trying to build two models at once. First, chief executive officer Scott Wylie says the company aims to be the first private bank and trust company in the western U.S. that is aimed at first-generation wealth instead of old-money, blue blood types, who he says have different needs. To do this, the bank is trying to build a company where wealth management is an equal partner and not just something shoehorned into existing banking operations.
"When we started this, we thought we would be a private bank with really good investment management," Wylie says. "What we're thinking now-or trying to do-is run a great wealth management firm off a private bank and trust platform." And as First Western expands, it's trying to reach this goal by recruiting financial advisors in the new markets it enters.
First Western is the fourth bank founded by Wylie, 50. He started it in 2002 with Warren Olsen, the company's 51-year-old vice chairman and chief investment officer, who formerly was president of Morgan Stanley Asset Management's global fund business.
"I'm not a banker," Wylie says. "I'm an entrepreneur who's been successful in the banking space. Warren isn't a banker, he's an investment management executive. We work hard not to think in terms of us versus them, bank people versus trust people, or investment people versus financial planners.
"We work together in teams of interdisciplinary groups," he continues. "Our technology platforms are woven together and we tell clients it's an integrated service. Hopefully, clients feel like they're getting a single, custom-made wealth management service."
In May, First Western bought Financial Management Advisors, an independent registered investment advisor in Los Angeles with a forte in fixed-income securities. It was the company's fourth purchase of an RIA firm since 2004, and its first beyond Colorado. The acquisition doubled First Western's assets under management, to $2.9 billion.
The game plan for acquired RIA firms goes like this: Buy them. Brand them with the First Western name. Hire a president to oversee operations and make the existing principal the chairman with a focus on client service and business development. And then convert them into a full-service bank and trust that offers private banking, trust, investment management and wealth planning services. The deal also includes back-office and technology support from First Western. "We have access to things a $100 million RIA can't get," Wylie says.
Wylie says the company initially planned to open 10 banks in the 10 largest wealth markets in the West over a span of 10 years to serve its client niche of households with a liquid net worth of at least $1 million. But after it acquired its first advisory firm, located in the smallish yet vibrant college town of Fort Collins at the base of the Rocky Mountain foothills, First Western saw an opportunity to tap into entrepreneurial wealth beyond just the big cities. Wylie got the OK from First Western's board to expand its initial 10-year, 10-city template. "We now want to have locations in the high 20s by the end of 2011," he says.
First Western currently has full-service banks built around acquired advisory practices in Fort Collins, Boulder and the upscale Denver section of Cherry Creek, along with its downtown Denver branch. It plans to open another full-service bank in Denver in September, as well as one in Scottsdale, Ariz. in October. The former Financial Management Advisors in L.A. remains an investment management office that provides portfolio managers with equity- and fixed income-based separately managed accounts.
The company's busy pace is generating a buzz-it recently landed at No. 382 on Inc. magazine's list of the 5,000 fastest-growing private companies.
Wylie didn't start out planning to be in the banking space. He received his undergraduate degree in economics and political science from the University of Michigan, with an emphasis on economic development in the Third World, followed by master's degree in development economics from American University. After a stint working with the Caribbean Basin Initiative, a Reagan administration initiative designed to promote economic development in that region, Wylie attended Harvard Business School and then went to work at investment bank First Boston Corp.
First Boston sent Wylie to San Juan to open the Bank & Trust of Puerto Rico, which he says was the island's first private bank. He moved to Denver in 1993, bought two small banks and converted them into Colorado Business Bank. Three years later, he started another private bank, Trust Bank of Colorado, that he later sold to Northern Trust for a sizable profit.
Wylie ran Northern Trust's Denver office for several years, and pitched an idea to the company to create a private bank within a private bank focused on the region's first-generation entrepreneurial wealth working in such industries as biotech, high tech and telecom. "We don't have a lot of intergenerational wealth here in the West," he says. "Folks of first-generation wealth want nimble financial partners, not a paternalistic relationship with a giant financial company."
Northern Trust didn't buy it, and Wylie eventually left. With no non-compete agreement holding him back, he set out to form First Western. "What we're doing is different from what Northern Trust is doing," he says.
Wylie was introduced to Warren Olsen by a friend and they hit it off. As Wylie kicked around the idea for First Western he saw Olsen as someone who could attract top investment management talent and get the company into high-quality investment products. He asked Olsen to join him, and they teamed up to start the company.
Olsen began his career as an accountant, after majoring in the subject at Georgetown, and also obtained a law degree from Villanova. After joining Morgan Stanley, he oversaw the creation of that company's institutional fund business. He left Wall Street at age 40 after the Morgan Stanley-Dean Witter merger and moved back to the Denver area, where he became president and CEO of IBJ Whitehall Asset Management Group. Assets during his tenure there leaped from $3 billion to $10 billion.
Olsen says it's a misconception to think he's solely responsible for First Western's investment strategy. "Scott has significant input [on the investment side], as do I on the banking side," Olsen says. "We started this with a shared vision to build the best private bank in the western United States."
First Western has a three-person acquisition team split between Denver and L.A. to identify potential advisor acquisitions. "We're not a roll-up; we're strategic buyers," says L.A.-based Russ Matthews, who previously worked with RIAs as a Bear Stearns consultant.
Matthews says he finds potential acquirees through cold calls and warm referrals-in the first case by scanning the Securities and Exchange Commission's database of ADV filings and in the latter by talking to RIAs he knows or other industry folks. "When they hear the word 'bank' they're usually intrigued, but they're cautious because they know that banks haven't been successful on the investment management side," Matthews says.
The ideal First Western advisor has a high-net-worth clientele and shares the bank's risk-managed, diversified wealth management philosophy. Matthews says the quantitative stuff-from due diligence to structuring the deal-is the easiest part to gauge. "You want to make sure the qualitative side is a fit because if it's not it won't work. I'm talking about the people there and how they serve clients."
And careful due diligence works both ways, too. Don Silversmith, who founded the wealth management firm Sterling Partners with his wife Debbie, wanted to expand his Cherry Creek practice and had little desire to be acquired. The Silversmiths were introduced to Wylie and Olsen by a client who was also a First Western board member. "One of the key elements is we had a lot of respect for their backgrounds," Silversmith says. "We had bankers and investment professionals approach us about acquiring us, but we didn'tlike their backgrounds."
The Silversmiths saw a chance to expand their business on First Western's platform while still running their own show. They sold their practice to First Western in 2005 for a combination of cash and stock, and have subsequently boosted their revenue more than threefold. Silversmith says a big chunk of that is banking revenue such as fees and interest income on loans, many of them to investment management clients. And he says that at a time when many Denver-area banks face liquidity problems, First Western's solid footing enables it to make real estate loans to clients.
Silversmith says First Western gives affiliates a lot of latitude in running their business. When Sterling Partners first joined First Western, the firm was using a lot of asset classes that were not a part of its new parent's investment management process. "They adopted them into their asset-allocation model," Silversmith says. "They thought it made sense. There's give-and-take here."
First Western's investment approach is to match portfolios with client goals and risk tolerance, and then build strategic asset allocation models around that, Olsen says. They take an institutional approach akin to an endowment model that uses six major asset classes--public equities, private equities, fixed income, real assets, absolute return strategies and cash. From there they allocate across subsets of these major groups, such as international and domestic equities among public equities. "We'll construct an asset allocation model of up to 14 to 15 sub-asset classes," Olsen says. "Then we show what we've built based on predicted long-term real returns and show historically what that portfolio's volatility may look like."
They'll make tactical allocation changes when times require it, like two years ago when they thought real estate investment trusts were overvalued and they dropped clients' REIT exposure to the bottom end of the strategic range, avoiding most of the pain when that group cratered in 2007.
"It's nice being right," Olsen says. "I think money management is as much about being wrong as it is being right. We try to minimize mistakes."
I'm A Banker?
Wylie says First Western employs four main types people-private bankers, lenders, trust officers and investment managers. He adds that the first three are easy to find and recruit, but that the last group is the hardest because they work at their own RIA firms. "We have to convince them that joining us is a great strategy for them and a great service for their clients," he says.
Jim Sprout was the first RIA to sign up with First Western after the Fort Collins advisor sold his eponymous advisory firm and a trust company he started a few years before. A couple of Sprout's board members were also shareholders at First Western, and they asked Wylie to help Sprout get his trust company off the ground. Instead, Wylie suggested that Sprout should sell his operations to First Western. Sprout liked First Western's business model, its capital backing and its sophisticated investment management platform, so he made the leap.
"Things have exceeded our growth expectations," says Sprout, chairman of First Western Northern Colorado in Fort Collins. He says his revenue has jumped from about $1.3 million in 2004 to nearly $5 million, with roughly half of that coming from banking activities. "I'd describe us more as a wealth management boutique with a banking component even though it's organized and structured as a bank," Sprout says.
But Sprout says the firm's move into a bank and trust was slower than he had hoped. "There's the issue of integrating other services into existing operations," he says. "It can lead to a new emphasis on how to approach clients, and it can require some patience."
First Western pays for RIA acquisitions with a combination of cash and company stock, typically offering a multiple of between two times revenue on the low end and something higher depending on a firm's revenue, net income and growth rate. "I think there's a narrowly defined price for these firms," Wylie says.
Advisory principals are expected to stick around for three to five years after the deal, and First Western doesn't fire anyone from acquired firms. Instead, it staffs its newly acquired RIAs with additional personnel, including a president-usually a local private banker-to build the new structure.
"My role in client relationships and business development and leadership hasn't changed," says Bryant Reber, who sold his advisory firm, Reber/Russell Co., to First Western in 2006, and who is now chairman of the company's Boulder-based bank. The bank office's day-to-day management now rests mainly with branch president Matt Roan, a former banker with JPMorgan Chase. Reber says he had input into Roan's hiring.
"We work closely together," Reber says. "It took away the part of the business that wasn't very appealing to me." He adds that the banking and wealth management staffs have a symbiotic relationship. "We're a team here," he says. "If you're an advisor looking to sell and don't want to be part of a collaborative team, there are other alternatives."
Making It Work
Both Wylie and Olsen are confident they're building a successful business model. Others aren't so sure. Chip Roame, managing principal at financial industry consultant Tiburon Strategic Advisors, says banks on the whole have done a poor job integrating RIA firms into their operations. "If they [First Western] can integrate them and cross sell banking products and asset management services, then hallelujah, I'll be impressed," he says.
David Grau Jr., marketing director at the financial industry consultant FP Transitions, said deals between banks and RIAs tend to go bad when both enter into it with dollar signs in their eyes rather than thinking about the strategic fit and what the post-deal relationship could look like. "Deals work best when sellers go in knowing what's best for their clients and what they want to get out of it," he says.
Part of the problem, says Pershing Advisor Solutions CEO Mark Tibergien, is that it can be difficult to combine an entrepreneurial advisory business with a traditional institutional business like a bank. Still, Tibergien says First Western's overall approach might have traction.
"I think the stated purpose of focusing on first-generation wealth as a differentiator is a clear statement about what they're willing to invest in," he says. "They seem to be targeting good anchor [RIA] firms to build their business on. The next question is how will they bulk up these firms and attract other people to the business."
Wylie acknowledges that one of First Western's big challenges is providing enough support to its field offices. "We're growing fast and we're making little mistakes that we're learning from," he says. "But we're getting the big things right and we're ahead of where we thought we'd be."
And as First Western executes its near-term growth strategy, it's also looking ahead to the ultimate endgame. One scenario is to sell itself to a larger financial services company. "Warren and I both worked at big firms and we're not really interested in that," Wylie says. A second option is to go public, which Wylie says could make sense someday given the bank's expansion plans. The final choice is to stay private and grow into a major long-term player in the Western banking scene.
Olsen, for one, still sees himself at First Western in five years. "I'm having a lot of fun," he says. "I've told people this is the last for-profit job I'm going to do."