One of the fastest-growing hybrid registered investment advisors has recruited a large southern California affiliate from the independent channel, continuing its rapid expansion.
Beachwood, Ohio-based Stratos Wealth Advisors announced the addition of San Diego-based Brown Wealth Management on Tuesday.
As of Sept. 15, Brown’s advisors served $525 million in client assets.
Stratos, an independent advisor network on LPL’s hybrid RIA platform, has nearly 200 advisors in more than 60 offices in 22 states.
“That number grows every day,” says Charles Shapiro, cofounder and managing partner at Stratos. “We have around $7 billion in assets under management.”
The Beachwood home office has 75 professionals in place to support the satellite firms.
Stratos’ history is an unlikely one. In 2008, founder Jeffrey Concepcion was forced to go it alone after a dispute with his former employer, Lincoln Financial Advisors.
That dispute hinged on a white paper from Concepcion proposing a new model for recruiting representatives and delivering advice. Lincoln fired him after 23 years of service, leading to a $2 million arbitration decision in Concepcion’s favor.
While the Financial Industry Regulatory Authority (Finra) sorted out his dispute, Concepcion put ideas from his white paper to work for his new firm, Stratos Wealth Partners, co-founded with three former wirehouse managers, including Shapiro.
“We were all advisors, we all went into management and were a part of the branch system for those firms,” Shaprio says. “In 2008 and 2009, when the debacle took place, we all realized the industry needed to change its direction.”
In the beginning, they had a top-heavy firm with a staff sized in anticipation of growth. For two years, Stratos operated at a loss, and with no private financing. The founders had no safety net should the experiment fail.
But the gamble paid off. As brokerages experienced attrition during the financial crisis, Stratos began to grow.
“Most of the advisors, the ones who were client-facing, were put in a tough position,” Shapiro says. “The things that had gone wrong with the business were largely out of their control. The advisors themselves wanted to go independent.”
In 2012, Stratos took off, adding 40 advisors to its network and increasing AUM from $3.2 billion to $5 billion.
“Those first couple of years, we were really investing in infrastructure and opening up locations,” Shapiro says. “We were recruiting and developing a process for transitioning advisors. In year three we went profitable.”
In 2013, Stratos reported $41.6 million in revenue, a 941 percent increase over 2012.
In seven years, Stratos has grown to become one of LPL’s largest affiliates, adding a new affiliated office once a month on average, mostly breakaways from wirehouse firms.
“Culturally, they still want to share ideas and be part of something bigger than themselves,” Shapiro says. “There’s never a particular wirehouse that we’re preying on or targeting, but at some point they have disenchanted their advisor force and that’s why we’ve had an opportunity.”
Stratos’ growth comes from concentrating on disillusioned breakaways.
“When approaching firms, we take more of a consultative approach than a sales approach,” Shapiro says. “We were in their shoes just six years ago, so it becomes a business planning discussion, a peer-to-peer relationship.”
The strategy continues to work. Earlier this year, Hudson, Ohio-based Ellsworth Private Wealth Management joined Stratos, bringing approximately $200 million in client assets with it. Shortly thereafter, Rancho Bernardo, Calif.-based advisor Hayley Higgins brought $100 million in client assets over.
In August, Chad Tom and Wayne Wycoff broke away from Huntington National Bank to form a Zanesville, Ohio-based Stratos-affiliate. Also in August, a $220 million team based in Prescott, Ariz., joined Stratos from Wells Fargo Advisor.
This continues a trend from 2014, when Stratos added 27 advisors to its network.
The south and southwest have been especially fertile areas for growth. In 2014, Stratos also opened up offices in Gulfport, Miss.; Scotssdale, Ariz.; Carmel Valley, Calif.; New Orleans; Conway, Ark.; San Diego; and Baton Rouge, La.
These advisors aren’t coming to Stratos for the money — the firm offers advisors lower payouts than other LPL-affiiated mega-RIAs. Instead, breakaways are attracted to Stratos because it eases the burdens of starting their own businesses. Large hybrid RIAs like Stratos allow breakaway representatives a "soft landing" in their transition from the wirehouse setting.
“Since 2008 or 2009, most of these advisors have wanted to take their practices private, or at least go independent, but they didn’t want to have to do the 30-plus things necessary to make that happen,” Shapiro says
New firms typically choose one of two models offered by Stratos. In the first, Stratos provides all the major resources that a wirehouse would to a representative, allowing a more seamless transition for reps nervous about going it alone.
“We have five full-time people on our transition team,” Shapiro says. “Advisors don’t have to come in and learn new technology and repaper their own practice. We take transition, a process that normally takes four to six months, and dial it in to 60 to 90 days.”
In the second model, advisors find and pay for all the resources needed to start-up their businesses themselves.
“We’ve transitioned 200 advisors over the past five to six years,” Shapiro says. “We have made all the mistakes that can be made, but we have developed processes and infrastructure.”
In the first model, Stratos equips the advisor with necessary technology and finds them office space. In the second model, advisors receive a higher payout in exchange for taking on more responsibility for running their practice.
“The full-service model is a more turn-key approach,” Shapiro says. “There are very few extra costs. If they choose the more independent model, there’s a higher payout, they get everything Stratos has to offer, but they pay all of the fixed costs.”
Overall, Stratos’s payouts range from 60 percent to 85 percent, generally higher than it would be if they struck out on their own. Advisors have equity in their own firms and the ability to gain ownership with Stratos after a year of affiliation in lieu of commissions.
Thus, Stratos allows representatives interested in breaking away from brokerages an opportunity to enjoy similar levels of support while crafting their own customized business, minimizing disruption to client services as they transition.
“After they transition their clients over, our advisors tend to grow very quickly because we take away the things that caused them to be inefficient,” Shapiro says. “If you take a wirehouse or bank advisor who has been confined to the technology and products and tools they’re given at the wirehouse firm, then expand them to the entire universe of tools, platforms and products, they tend to be able to grow at a faster rate,” Shaprio says, stating that Stratos’s firms grow at an average of 19 percent per year per advisor. “That’s almost six times the average independent advisor.”
Stratos brings some of the resources of a national firm to the local level to help its advisors manage their practices, including compliance and technological resources.
“We provide ongoing support,” Shapiro says. “We have a system-wide CIO. We provide analysis, supervision and compliance support. We have an IT desk staff to deal with phone calls from our advisors
Stratos pioneered an Apple iPad order entry system through a virtual desktop environment, and brought in Riskalyze technology to assist its advisors.
Advisors don’t just create their own client niche, they can choose their own specialization to best use their expertise and create their own fee model. Thus, Stratos operates like a virtual professional organization of representatives collaborating to provide full-service advice to their clients.
Stratos also seeks organic practice growth. Advisors actively seek referrals, and routinely ask for the names of 100 potential prospects from their clients. They are also encouraged to leverage local law and accounting firms.
“We have also gone in and established bank relationships so our advisors can be the wealth advisors of local banks and credit unions,” Shapiro says. “That sets us apart and is generally why people want to be a part of our firm.”
In the long term, Stratos can serve as a succession plan for independent representatives and advisors, taking over their book of business when they decide to hang it up.
“We have made 20 practice acquisitions in the past two years,” Shapiro says. “The advisors who want to retire, we’ll help buy their book and transition it.”
For LPL, firms like Stratos are engines of growth that have helped it remain the nation’s largest independent broker-dealer — LPL grows as a custodian as the hybrid firm provides back- and mid-office support.
Stratos’ strong growth shows no sign of slowing, says Shapiro, with an average of 30 advisors joining the firm each year.
“The advisors we’re seeing are larger and more productive advisors than we saw at the beginning, and we think that trend is going to continue,” Shapiro says. “We’ve taken this hybrid RIA solution and made it fit all business models, and we’ve created something unique in the affiliation model that provides a higher service for our advisors.”