It's hardly news that wealthy families have been turning their backs on advisors who disappoint them and moving to new ones they can count on to avoid conflicts of interest, provide complete transparency and act as true fiduciaries. What's new is that these families now have a "search firm" to perform due diligence on advisors and help the families find exactly the right one.
Like many entrepreneurs, Doug Black, former chief operating officer of UBS Private Wealth, realized after the 2008 economic collapse that "the client had been left out of the equation in financial services." He set out to remedy that by founding SpringReef Partners in Short Hills, N.J. Black says he set out to build a "pure firm," and that his entire business is independent, unbiased and client-centric. "Our sole source of income is from clients," he says. "We get no money from advisors or firms."
When Black is able to save a client money by renegotiating fees, as is often the case, "we pass 100% of those savings onto the client."
In the first two years of operation, SpringReef has helped 30 clients, with an average of $50 million in assets, find wealth advisors. Another 11 clients who represent $750 million in assets are in the evaluation pipeline now.
SpringReef, has only two employees-Black and Anna K. Rygiel, head of brand development. The two spend several hours with new clients to assess their needs and discover what type of financial advisor would suit them best. Black then sets a fee, based either on his hourly rate of $700 or a fixed amount. A search costs about $15,000; the minimum fee is $5,000.
Advisors aren't always happy to find out their clients have hired Black to examine them. "Advisors who do not meet our standards do not like us," he says. "The best they can expect is to come out neutral. They get to keep the assets under management but they will get no new money."
Black performs due diligence on three different business models-RIAs, broker-dealers and the private trust banks-and says he is not biased toward any of them. However, "the surprise to me is how exceptionally talented the RIA space has become and how many clients gravitate to an RIA." A significant number of clients come out of the broker model and move to an RIA, he adds.
Black modeled his firm on institutional consultants. He looks at every aspect of an advisor's business to answer the question, "Does this firm provide a fully integrated wealth management service?" Then he puts that firm on the approved list or recommends that clients consider it. How does Black evaluate a firm? The fiduciary standard is important, he says, as are transparency and the firm's elimination of conflicts of interest and proprietary products. Cost is also a factor.
When he's examining RIAs, he looks at both their ADV forms and their marketing materials. He circles items in these documents and then follows up with the firms to get answers to specific questions. Because there is no required disclosure for a broker-dealer other than Finra, Black asks brokers to fill out an extensive questionnaire. After an initial meeting, Black writes down more questions and meets with the broker again. It's not unusual to go through three or four meetings. For private bankers, SpringReef sends an initial inquiry, reviews marketing materials and then follows up with more questions.
The price of the advisors' service is important, but Black says he never picks a firm based on cost alone. "We have a good feel for prices in this industry," he says. "I've never seen a client make a decision based on fees."
If Black thinks the fees at one firm are out of line, he tells them and gives the firm an opportunity to bring them in line. In one case, Black called an advisor and explained why the fees were too high. The next day, the advisor reduced the fee. "It's not unusual for a client to get a break on fees that covers our cost," he says.
When evaluating fees, Black looks at the amount in assets a client has, how complex the portfolio is and what value an advisor can add. For instance, a firm that uses passive management should cost less than a firm that uses active. A portfolio of ETFs should have low fees. A portfolio that leans toward bonds should cost less than one that leans toward stocks. "Pricing is all over the map," Black says.
A lack of transparency is also an issue. Black says he's had clients tell him they're paying only 55 basis points and he discovers they're actually paying 180 basis points with "all in" costs including management fees. He doesn't immediately rule a firm out because they have proprietary products. "If somebody is the best at something, that's fine," he says. But if seven out of 14 products are proprietary and six of them perform at the bottom quadrant of their group, it makes for an easy decision.
Most clients come to him because they are unhappy with their current advisors. Although Black is willing to keep working with those professionals, most of the clients "have already emotionally made the decision to leave," he says. They hire SpringReef for a variety of reasons, often because they've had a change in circumstances, such as an inheritance or a change in liquidity.
Some of his clients like certain aspects of their current advisor relationship but they want Black to talk with the advisor about something they don't like, such as too many proprietary products or exorbitant fees. "Unlike firms that have clients for a long time, for three-fourths of them, if we do our job correctly, they shouldn't need us going forward," he says. Yet 20% to 25% of the clients keep SpringReef on retainer so they can call him whenever they like.