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.
Persuading clients to move to Luminous turned out to be easier than they anticipated. Then again, given that virtually all their clients were self-made, entrepreneurial types from the small business and venture capital worlds, maybe they should not have been surprised.
"Two-thirds were very excited. We had good relationships with them and they had started businesses themselves," Sear says. "Others, though, felt a sense of security with a big investment bank like Merrill and wanted to compare the balance sheet of Fidelity [Luminous' primary custodian] to that of Merrill. We were able to convince clients that we would have a bigger toolbox at a lower price."
As events played out over the summer of 2008, the security associated with giant financial institutions started to evaporate. Indeed, Ip admits she was surprised their old firm did not come up with a more compelling value proposition to convince clients to remain at Merrill. But at that point, the other brokers in the office probably were working overtime just to keep their own clients from jumping, either out of the firm or out of the market completely.
Luminous principals had a catbird's perspective on the financial crisis. They and their clients were invested in one hedge fund managed by John Paulson, who made his reputation and fortune making huge short bets on financial institutions. But their request to be able to invest in Paulson's Credit Opportunities Fund, which was up about ninefold in 2008, was declined by Merrill because it used too much leverage. But in the end, it was Merrill, not Paulson, that ran into problems with excessive leverage. Knowing what Paulson's thinking was about the state of the U.S. banking system, the team, still at Merrill, entered 2008 with 40% of their client portfolios in cash.
"The problems at Merrill put further urgency in our decision," Ip says. "And we were concerned about the general state of the financial services industry. Choosing Fidelity, a private company that wasn't in investment banking, was important."