In 2002, Shannon Eusey was about to make a fateful decision. She was about to ditch a well-paying financial services job, shuck her house in the Hermosa Beach area of Los Angeles and start her own firm with a couple of partners down in Newport Beach. It would take about $1 million in capital to start up. They had personal credit lines ready in case they needed them to make payroll. She was eight months pregnant with her second child.
But the firm she was founding, Beacon Pointe, was not just a regular entrepreneurial opportunity. It was a chance to go into business with another risk taker, her father Garth Flint, who was also leaving behind a good job, a large institutional investment consulting business he’d co-founded, to start his career over yet again—and create a new model that married institutional-class investment counseling with the private client wealth management business.
Flint and Eusey, partner Matt Cooper and another colleague from Eusey’s firm Roxbury Capital realized that their institutional access to products and their allocation processes would naturally be appealing to wealthy people. Eusey even wrote up the business plan for the firm as part of her MBA thesis during the later days at her old firm.
Thirteen years later, the firm they founded, Beacon Pointe, has grown into a family of firms, including an acquisition unit looking to create a national footprint like that of Mariner Wealth or Focus Financial Partners. The firm has seven offices in the west, but this summer has been closing in on its first Boston office to add $300 million to its $3 billion or so in private client assets (it still oversees $6 billion in institutional money).
An Idea
If you think it requires a certain kind of mettle to leave good-paying jobs to take on a big risk, much less at a later stage in your career, then you don’t know the half of Garth Flint’s story. The California native is also a Vietnam veteran, who flew F-4 fighter jets for the U.S. Navy while assigned to a couple of carriers, including the U.S.S. Coral Sea. In late 1967, right after Christmas, his recon plane was shot down over Haiphong on the Gulf of Tonkin by a North Vietnamese AAA anti-aircraft gun as the plane was doing 450 miles an hour.
“We were trying to get in and see basically whether the bombing mission in front of us was successful,” Flint says of his experience. “We were taking pictures with a photo recon airplane.”
The weather was bad and as soon as he and the pilot came out of a cloud, the plane was hit. “It was a great shot. [They first fired] a red tracer above and green tracer below. That’s how they kind of line up on you.” Both pilots ejected, not sure whether they would land in the water or on a few inhabited islands. It was an important distinction.
“The idea was that if you [land] in the water, you’re going to get rescued. If you don’t, it gets iffy. If you’re near a metropolitan area, you’re not going to make it out.” Some 20 other pilots shot down on that same carrier during the same deployment were either captured or killed. Flint and his co-pilot were the only ones that got back to the ship. (Flint’s story is told in rich detail by author Tom Wolfe in his essay “The Truest Sport: Jousting With Sam And Charlie.”)
Back home, Flint began a career as a stock broker at Merrill Lynch. “But pretty early in my career I realized I wasn’t really good at picking stocks or recommending stocks.” Instead, he got into the consulting business at Merrill. He then helped Kidder, Peabody set up its consulting business on the West Coast. (He also eventually fathered a family with six children. Eusey and one sister work at Beacon Pointe, while two other siblings also work in financial services.)
He’s willing to take calculated risk, says his daughter Eusey, but because of his experience, he always wants to know what happens when the plane comes down.
Flint was working at Kidder in the late 1980s when he and his team lost a bid to become an asset management consultant to an insurance company. Independent firms with no conflicting commission schedules seemed to be the big thing. So he and three other renegades set out to form their own firm, Canterbury Consulting, in 1988, which focused on helping non-profits. The culture was built around the philosophy of preservation of principal for these organizations so they could meet their obligations (paying out scholarships, for example). The approach was conservative and wary of bull markets.
“Institutions are held to a very high standard,” Flint says, “There’s a lot of visibility, both in the community but at the board level or at the institutional investment committee level.”
Fourteen years after launching Canterbury, however, Flint found himself at another crossroads. Canterbury had a broker-dealer, so it was taking both commissions and fees, which Flint saw as a conflict of interest. By that point, however, he was unable to change the firm he had helped start from within, and he found he had to move on again.
It was about the same time that his daughter was looking for change too. Eusey, a marathon runner with four kids of her own, had risen through the ranks at Roxbury Capital, a growth stock shop, starting as an intern in 1994 when it was a billion dollar firm and leaving there eight years later as managing director when the firm had $15 billion. After Roxbury was bought by Wilmington Trust, she took a detour to grad school.
The business plan for Beacon Pointe was written during her MBA program in August 2001 by Eusey and three others in an entrepreneurial class, and they laid out the premise: “Over 7.2 million individuals have financial assets in excess of $1 million,” the report read. (Eusey, when asked, can still fetch the plan from under her desk.)
“We identified a problem that the wealth management business has been highly fragmented because it’s product-centric,” Eusey says—and hampered by distinct sales channels across regulated industries. “There’s broker-dealers, there’s money managers, insurance folks, but nobody has really taken a hold of wrapping it all together. No one has taken a holistic approach yet looking at the client and saying what is best for you, client, working as a whole.”
She and her classmates got a “B.”
The idea was also to approach the entire RIA business differently—and get producers out of the business of running the business. Eusey, new MBA in hand, was charged with figuring out strategic marketing and business plans and running the firm day to day so everyone else could focus on their talents.
Like all firms, this one made mistakes. “Because we’re so entrepreneurial, a lot of ideas get thrown up, and sometimes the ideas are not the best ideas, but we’ll chase an idea down the rabbit hole.” The firm, reflecting its non-profit roots, is also conservative toward investments and drifts toward managers who stress valuation, she says. Matt Cooper adds that the firm had to buy out one of the early partners fairly early, which also caused a setback.
“In hindsight, you think what on Earth were you people doing?” Eusey says. “We didn’t pay ourselves for the first year. My dad was in the late stage of his career. Matt Cooper [had been] making a ton of money [at his previous job]. But it was really true, we felt to the core that we have something special. … Failure was not an option.”
Adds Eusey, “We talked about doing the full-service, myCFO type of work which we didn’t go into because we thought, my gosh, the bill paying and all that other stuff is probably not a huge value add to clients, but I’d say over the last five years, we’ve really evolved into more of financial planning as a key focus of the firm, equally important as the investments. Because if you don’t have the right planning, it’s very hard to structure the right relationship with the client.”
The institutional bias started to change quickly. A huge boon came in 2004 when the firm got onto the Schwab Advisor Network retail referral program. “The result of that was we were bringing in $120 million [the first couple of years] just from that channel, which then spread our footprint,” Cooper says. Ironically, the firm almost turned the referral network down because it meant lowering account minimums, which it thought would dilute the brand offering.
A big selling point is the firm’s research and manager screening, which Flint wanted to stress at the new firm. Beacon Pointe works with both separate account managers and mutual funds, but likes boutique firms that are employee owned with disciplined, repeatable processes. The firm has 90 different mutual funds and separately managed accounts, and about 15% are alternative strategies—hedge funds, private equity, real estate, venture, etc. But Cooper says alternatives don’t usually wind up in more than 5% of a private client’s portfolio. The firm likes long strategies.
In 2011, the firm started its financial planning component under the eye of Commie Stevens, an estate planning attorney hired in 2008. “She built our entire department and platform,” Cooper says. “So we have two estate planning attorneys and three CFPs who are dedicated just to supporting our
client-facing advisors, many of which are also CFPs. So the private client side of our business over the last seven and a half years has evolved to be 100% planning first and then the planning is run by what we believe is a superior investment platform.”
Serial Acquirer
Eusey says that an important part of the culture is to let people run with new ideas. And it was Cooper’s idea in 2011 that Beacon Pointe needed to launch a new strategy, Beacon Pointe Wealth Advisors, when he realized there was money in the streets—in the form of mom and pop RIAs with no exit strategies.
“I was on the TD Ameritrade advisor panel and they invited Rudy Adolf from Focus Financial and Mark Hurley [of the Fiduciary Network] to come in and talk to the panel,” Cooper says. “A fantastically entertaining meeting. … The message I took from that meeting is that there are thousands of small wealth managers, RIAs out there that will never create any real value in their enterprise value of their business because the owners are the business, and when they’re gone, there is no more business.”
Many firms peak at the $150 million to $200 million level, Cooper realized. “Why was their growth decelerating and just stagnating?”
“The light came on in my head,” Cooper says, “And I said, we can provide a solution to the marketplace because we’ve got a lot of stuff here at Beacon Pointe that smaller firms can scale off of.” Though asset appreciation over the past six years has given many smaller RIAs confidence, the market is fickle and asset values could plummet. They also know they are facing compliance problems and robo-advisors, and know they’ll have to reinvest in their businesses. Many small advisors don’t want to take the money they’ll need out of their own pockets, Cooper figured.
The firm’s strategy is buy RIAs by paying them in shares of Beacon Pointe. They become paycheck earning employees of Beacon Pointe, but also K-1 business owners in charge of their own P&L statements. Some have criticized deals that are paid for in shares, asking where the liquidity is, but Cooper says that his offering is tailor-made for advisors who want to retire in three to seven years—people who might be staring into the teeth of a bear market and plummeting asset values just when they want to cash out.
“It will be accretive to them when they join us, their equity value goes up because Beacon Pointe trades at a higher multiple than XYZ manager down the road,” Cooper says. “And then we’ll put them in a position to grow much faster, use all the resources of Beacon Pointe, free them up to focus on what’s most important. Then when they want to retire, we have to have a nationally recognized third-party firm value the overall enterprise. Whatever they own, whatever percentage they own, we have to buy them out at fair market value with no discount. So it’s solving all of those issues. Growth, creating enterprise value, succession planning … empowering the next generation and recycling the equity to the next generation of that local firm.”
He adds that the firm puts a floor under the buyout, equal to the advisor’s entry evaluation.
“So if you’re somebody who’s 60 years old and your valuation has doubled since 2008, and you’re starting to feel like we’re maybe at the top of the market and you’re trying to figure out your succession plan, but you want to work for a few more years, why wouldn’t you merge into Beacon Pointe and put a floor under your valuation just in case we have another 2008 scenario? You don’t have to wait for an entire market cycle to get back to where you are, which puts you well into your 70s.”
Not that getting into the acquisition business was easy.
“When we first started, I had to deal with custodian partners and different M&A folks in the industry kind of chuckling under your breath, ‘All you have is a business plan and an idea. Good luck with that.’ He had no transition team yet, and he says he spent too much time chasing wirehouse people who were too encumbered with trailing commissions. He also relied too much on custodians and recruiters to make introductions.
“There are a million moving parts” to an acquisition, Cooper says. “And I only anticipated a quarter million moving parts.”
To keep the culture is place, the firm is looking at fee-only RIA wealth managers, no wirehouse people or hybrids, firms that use third-party money managers (not stock pickers). “That means they’re more outwardly focused on their clients than inwardly focused on their 10Q and 10K.”
The firm has bought five firms so far, and was finalizing its sixth in Boston at press time, its first East Coast presence far away from its California and Scottsdale, Ariz., offices. Cooper says that he’s also looking at firms in Ohio, Connecticut, Texas and Washington state. The plan is to make four such acquisitions a year.
No IPO
Cooper says that people can call the strategy a rollup if they want to, but an important distinction is that Beacon Pointe is not planning to do an IPO. Instead, the company wants to build a national brand and footprint. What does that mean for succession at Beacon Pointe, especially if 80% of the company at the holding company level is held by Flint and Eusey?
The partners say that the succession plan is in the youth of the firm. Of the seven partners, only Flint is over 50, says Eusey, and the other six are under 45.
“So it’s a young, smart energetic culture here with many women in the firm and many women in leadership positions,” Cooper says. (The firm also forged a Women’s Advisor Institute at the beginning of 2011. The institute offers a website, workshops, tips and resources and is meant to reflect not only the diverse values of different clients but also the firm itself, which has a substantial number of women in staff and leadership roles.)
The idea of letting people run with ideas is partly the reflection of Flint, who, though he is mainly running the institutional business, has stamped the culture with his personality.
“You want people who are a little bit off the trail themselves, so if they have good ideas, then let them run with the idea and then support them,” he says.