On a Friday afternoon shortly after 4:00 p.m. on May 9, 2008, four of the five future partners of Luminous Capital, a firm that would begin operations in less than 60 minutes, walked into their branch manager's Los Angeles Merrill Lynch office and told him they were resigning to start their own firm.
A fifth partner led 14 Merrill employees, who had worked with the team, off to another office in the same building and offered them all jobs. The employees, who had no knowledge of the creation of Luminous, were asked to fax in their resignations from Merrill within the hour so they could help transition clients over to the new firm starting at 5:01 p.m. Call it short notice.
After listening to the reasons for conceiving Luminous, 13 of the 14 employees agreed to fax in their resignations, while the 14th asked if he could mull it over during the weekend. On Monday, he signed on and reported for work with the other 13.
"We offered them equity participation grants to help them realize how important they were to us," says Kim Ip, who became chief operating officer and research director.
Knowing they would have to spend the next several months convincing clients to move their accounts, the partners got a dress rehearsal that afternoon in persuading employees to join the firm. Over that May weekend, clients received an e-mail brochure entitled, "Why," explaining the reasons that the group was launching its own firm.
What seemed so simple actually was years in the making. Ip recalls that when she joined the team in 2005 from Merrill's investment banking unit, her future partners had already been in discussions about forming an independent RIA firm.
The principals at Luminous had managed $8 billion in client assets at the giant wirehouse, though much of it was situated in stock options and restricted stock plans they planned to leave behind. But the formation of Luminous that Friday afternoon entailed nearly one year's worth of meetings on weekends and weekday nights, the retention of Brian Hamburger, founder and managing director of MarketCounsel, and numerous decisions about how to structure the firm.
Over the 18-month period between January 2009 and June 2010, it is estimated that about 7,300 brokers departed Morgan Stanley Smith Barney, Bank of America, Wells Fargo Advisors and UBS Wealth Management Americas. Some departures no doubt were involuntary and the exodus has slowed somewhat.
Hamburger estimates that MarketCounsel is retained by more than 20% of the large corner office teams that have exited Wall Street's wirehouses in recent years, and his consulting firm has an RIA incubator program that forms advisory firms. He says MarketCounsel is still starting up about one firm a week. "I like to tell clients that their firm will be up and running between the time they leave their old office and before they reach their new office, as long as their new office is a 15-minute drive from the old one," Hamburger jokes.
It was upon Hamburger's instructions that the principals of Luminous were forbidden from sharing any of their plans with either existing clients or future employees. "I have to give Brian credit for legal advice that would ensure that we weren't sued or given a temporary restraining order," Ip notes.
Starting in the summer of 2007, the principals first hashed out what kind of firm they wanted to create. Initially, they considered launching their own broker-dealer to run alongside the RIA. But since many had worked in firms with proprietary products and platforms, they argued back and forth about whether they could operate a brokerage and still offer objective, "agnostic" advice.
"Selling a bond portfolio out of a broker-dealer's inventory" ultimately didn't sound very "agnostic," notes Mark Sear, a Luminous partner. So they decided to relinquish the 30% of their business that came through commissions and take the RIA-only route.
The launch of a business with 19 people that hits the ground running at 5:01 p.m. on a Friday afternoon entails lots of advance planning. Finding the appropriate office infrastructure, creating a financial model, devising a marketing plan and selecting a custodian and a technology platform meant that each partner had to take on major assignments while still busy serving clients on behalf of Merrill. Hamburger and his staff at MarketCounsel have transitioned hundreds of wirehouse teams to independence, but ultimately, the new firm has to know what it wants to achieve if the business plan is to work. Ip was in charge of coordinating the move, holding all the partners accountable and ensuring that the business hung together.
Sear recalls lots of "macro-level issues with micro-level details. It turned out we outsourced almost everything we could, including payroll, health care and computer systems."
The actual divorce from Merrill turned out to be surprisingly amicable. "We had reached the conclusion that there were better alternatives for us and our clients," Sear says. "It was not a surprise to Merrill Lynch either. We had had a number of meetings with them. They made a good faith effort to improve [their services] and they put us on some committees. But it was like turning an oil tanker."
Part of the reason for the friendly separation may be that Luminous only took $1.7 billion of the $8 billion they managed out of Merrill. Less than three years later, the firm now has $4 billion in assets, six partners and 21 other employees.