When Sullivan, Bruyette & Speros opened for business on January 15, 1991, the Persian Gulf War had just started and the nation was entering its first recession in eight years. The entire financial-services industry was in the throes of a banking and real estate crisis, so Eleanor Blayney wasn't particularly concerned about the firm's name, even though she was the only partner whose name wasn't on the door. After all, she had practiced as an advisor for only three years.
Even then, the concept of a true partnership was pervasive at the firm, not something to which the principals paid lip service. Back in its formative years, the firm embraced some policies that were radical, even by today's standards. "When we started in 1991, I was a full partner, but I didn't bring in one client and wasn't expected to generate any new business," recalls Blayney. "My partners never demanded that I bring in business; I was completely carried by them. They were very generous in making that happen."
Not that she or they thought she couldn't bring in clients. It was simply that they wanted to go into portfolio management and wanted someone to focus on it full time. "Greg {Sullivan] had a vision of my career before I did," she says. "He is the fairest person I've ever worked with."
Two years later, Blayney's name was on the door, lending symmetry to the firm's initials (SBSB), and she had emerged as one of the profession's most respected advisors and one of the conference circuit's most popular speakers. She now brings in her fair share of clients. Yet her career at SBSB is only one example of how the firm has departed from most advisory shops' evolution and how the partners have designed a business model constrained by very few of the limitations engulfing many of their colleagues.
From its inception, the original partners of Sullivan, Bruyette, Speros & Blayney wanted their firm to be different from the mainstream in more ways than the simple suppression of egos. Starting with the experience clients could expect, they created a free-flowing structure that would guarantee a higher level of service and advice, discourage the territorial turf wars that hamstring so many small-business partnerships and encourage talented employees to grow professionally with a chance to become partners. Today, SBSB is one of a handful of independent advisory firms with the potential to become a super-regional one, with a major presence in its primary market.
Without a doubt, the single biggest decision the McLean, Va.-based firm made before it opened its doors was that the partners would share clients. The decision to create an "open-architecture platform" for both partners and clients set the tone for SBSB's operating philosophy, management style and, more recently, its expansion strategy.
"Our clients are clients of the firm," says CEO Greg Sullivan. "Nobody creates boundaries or fences around clients. If I get into AOL, pick up some clients, and another person is better suited to service them, they will get to."
One factor inhibiting the growth of many advisory firms is that the partners tend to be very protective of clients and only share resources and support services. It doesn't take long for these business models to prove that they are not scalable. Many advisors delude themselves into thinking their clients are at the firm because they brought them in. This translates into what Sullivan calls an "eat what you kill" compensation structure that can easily create suspicions and boundaries. "In most cases, they are there because they get good service and advice, not because of one individual," he explains.
Jim Bruyette, chairman of SBSB, maintains he and Sullivan, who had known each other since the early 1980s when they both worked at Ernst & Whinney, made sure "there were no incentives to hoard clients" at the outset. "We removed all the walls that prevent the client from being served optimally," he says.
Instead of hustling new business, Blayney was placed in charge of the firm's portfolio-management department, which handled a modest $4 million in assets in its first year. Armed with an M.B.A. from the University of Chicago, Blayney was better trained than most advisors circa 1991 to lead the firm's charge into asset management. "What was key was that we recognized that portfolio management was the area of the business we wanted to develop," says Pete Speros. "Having Eleanor as the portfolio-management partner was radical at the time, but we needed that."
It paid off. By early 1993, SBSB was managing more than $50 million in assets and the firm was growing fast at a time when many advisors were struggling to persuade clients the newfangled assets-under-management approach aligned both their interests. "Our five-year goal was to get to $100 million, but we got there in three years," Speros recalls. All this happened in an environment in which the economy was expanding slowly and the stock market was generating single-digit returns. Some might call it a not-so-distant mirror of today's business environment.
As it turned out, the open-architecture platform Sullivan and Bruyette designed proved prescient for reasons besides discouraging the territorial conflicts afflicting so many firms. Moreover, it created an operating structure that left the firm with very few limits to its growth. Today, SBSB's client list totals 500, and its asset base is approaching $900 million in assets. It stands as the premiere independent advisory firm in the Washington-northern Virginia area. It has liberated itself from the ceilings that so many advisory firms seem to keep bumping their heads against every time they reach another milestone in assets under management, whether it is $25 million, $150 million or $400 million. "We've rededicated ourselves to standardizing processes and procedures while recognizing the individuality of each client," Blayney says. "We want to grow, but not at the expense of quality service."
The advantages of scalability are just beginning to play into the firm's hands. This past January, Margaret Welch moved her practice from Armstrong, Welch & McIntyre, a high-profile firm in the nation's capital, across the river to SBSB, bringing with her about $150 million in assets. "I wanted to spend more time practicing financial planning and less time on the responsibilities of business ownership," Welch explains. "I didn't move to leave Alex [Alexandra Armstrong]. The real motivation was the need for a different level of support. I needed it one way or another. I could have hired it there or taken advantage of existing capacity here [at SBSB]. The problem there was I needed three different people with separate skill sets for about one-third of their time."
Another attraction for Welch, who is in her sixties, was that over the next decade, she can scale back her workload and there is "the potential for a buyout here." At her old firm, that was not a real option, since her partners were roughly her age.
But there are other differences as well. For example, her old firm did not have a specific portfolio-management department with dedicated personnel. "The firm-wide responsibilities here work a lot better for me at this point in my career," she says. While admitting she doesn't know every firm in the greater-Washington area, Welch claims SBSB is the only firm she considered.
Later this spring, Sullivan says the firm is likely to acquire another one with a younger principal who is eager to grow his business and knows he needs more resources and infrastructure to get there. More transactions are likely to follow in the next five years. So far, Welch's transition has been surprisingly smooth, and if the next transaction goes the same way, several others may be in the works.
At the outset, the firm's clients consisted mostly of lawyers and lobbyists who populate the Beltway area. But luck also played a role in the firm's heady growth. In the early 1990s, Sullivan landed a new client, the head of Microsoft's Washington, D.C., operations. Pleased with the advice he got, this client soon began referring a number of executives in his office to the firm. This group of young clients may have been brainy, but they were also perplexed by the problem of managing their increasingly lucrative stock options.
When they formed the firm, the partners knew they liked each other, but they didn't know how they would interact. Their interpersonal dynamics were tested when Sullivan kept hitting pay dirt, or what he calls a "few good blueberry patches." Within a year of SBSB's inception, oil giant Mobil Corp., which had moved to northern Virginia, initiated a downsizing program, sending the firm more executives forced to take early retirement than it could handle. SBSB also picked up clients from both Fannie Mae and Freddie Mac.
Faced with a deluge of new clients, Sullivan was happy to share them with his partners, especially since he was about to become president of the International Association For Financial Planning. But he didn't want his partners starting their own firms and walking off with them.
The solution was the four of them signed an agreement that Blayney describes as the exact opposite of a prenuptial agreement. "The agreement binds us at the hip," Bruyette says. "It precludes the option of one partner leaving with clients. Financially, it's just not viable for any of us to leave. As it turned out, it kept all our focus on building the firm's value and making it an entity that was stable and solid."
That's not to say there weren't disagreements. The partnership agreement permits them to put decisions to a shareholder vote-Sullivan and Bruyette have larger ownership interests than the other three-but it's never come to that. "Everyone has an equal voice, and we've had some pretty tough arguments," Sullivan says. "But if we don't have agreement, if two of us are against something, we're not ready to make a decision."
Some disagreements are inevitable in any business, particularly one that has grown as fast as SBSB. Today, each partner has a team of professionals that works with them. The partners vote on each other's pay, and while that hasn't caused problems, the decision of what to pay their teams has. Three other professionals, Marc Johannessen, David Fox and Dana Sipple, now are owners in the firm via nonvoting stock, and the firm is looking at a stock-option plan to pass the benefits of ownership further down the ranks.
Johannessen, who holds the title of senior planner, was present at the creation of SBSB and previously had worked with Bruyette. After spending a year as a financial-planning assistant, he began to build his own practice. In 1995, he moved to client services, where he was reintroduced to Bruyette's clients and met clients of the other partners.
It was at about this time that the firm restructured itself so that all clients had two advisors, a partner and a senior planner. "Clients loved it," Johannessen says. The goal, which was for senior planners to become the relationship managers, has worked well and is still in place.
Like other advisory firms that moved into asset management, SBSB partners spent considerable time in the firm's formative years asking themselves what their real business was. "At one shareholders meeting when asset management was all the rage, Jim asked, 'Are we an asset-management firm that does financial planning, or a financial-planning firm that does asset management?'" Blayney recalls. "Out of that meeting grew the conviction that asset management could be profitable."
In addition to placing as strong an emphasis on financial planning as on asset management, the firm also decided to grow its tax practice. Both Sullivan and Bruyette are CPAs, and they believed preparing clients' taxes would enable them to serve clients from a more holistic perspective. Even today, when the firm recruits young advisors, it looks favorably on CPAs-and very favorably on CPAs who are also CFP designees.
By 1994, SBSB was confronted with the kind of sudden-wealth client who started populating advisors' offices in the late 1990s and giving them migraine headaches. But in those days, arguments in favor of diversification got a polite reception, not the frosty, cynical response accorded to such reasoning when tech-stock fever raged later in the decade. "We told them that every quarter, [Microsoft chairman] Bill Gates exercised options and sold shares, and so should they," Sullivan says.
A few years later, another company, America Online, took off in SBSB's own northern Virginia back yard, and the young and wealthy soon represented the firm's largest cluster of clients. With tech-stock mania suddenly approaching the level of a national epidemic, the firm found itself flush with young clients and problems. "We didn't want to be the next Merrill Lynch, so we tried to identify clients with unrealistic expectations," Bruyette says.
The only problem was that the new investor class consisting of more than 100 million Americans was, as a group, experiencing a sea-change in its expectations as the Standard & Poor's 500 Index recorded five consecutive years of 20%-plus annual returns. At least, SBSB had plenty of company. "Young high-tech people are extremely intelligent in many areas, but you have to spend more time on education and expectations," Bruyette says. "This market is validating the benefits of asset allocation."
Ultimately, it's their money. "Once clients have $5 million or $6 million, we make it clear they don't need to shoot the lights out," Speros says. "Some people have kept more in a position than they should have, but they haven't sacrificed their independence. But once we helped them secure their future, that decision is theirs. Now, several are saying they wish they had listened more closely to us. In a way, it's gratifying, but easy come shouldn't mean easy go."
Although SBSB doesn't do a lot of lifestyle planning, it has many clients who have retired in their late thirties and early forties. "So far, they've done well," Sullivan says. "Many are very active as volunteers in their communities, some have gone back to school, and one is about to become a history teacher."
While the five partners are good friends, they also make time for their families and personal pursuits. For a few years, Sullivan would leave early a few days a week to coach his children's soccer games. "Now, their teams are at the point where they need a much better coach," he jokes. Speros, a former NFL linebacker who co-captained Penn State to a national title in 1982, currently is coaching his son's baseball team and leaves early on occasion.
Growth often comes with pain, and SBSB hasn't been immune from that. With 37 people in the firm, managing them is now a major undertaking. Speros recalls that in the mid-1990s as the firm ramped up on the steep part of the growth curve, certain personnel-management mistakes were made. "We found positions for some people that weren't the best place to put them, things like trying to make an investment specialist a tax specialist," he explains. "In the last three years, we've decided to have specialists, not generalists."
The firm has restructured itself, creating teams of specialists to work with individual partners. Each partner has a tax manager, a portfolio manager and a financial-planning manager. Both the portfolio manager and the financial-planning manager on each team have associates beneath them. What Welch likes about the firm is the amount of interaction among the principals about investments and other topics, as well as the level of support she gets.
SBSB takes investment performance very seriously. While not telling clients overtly it can beat indexes, the partners privately take some satisfaction when they are able to do exactly that. "Money is managed more to a client's goals than it is to hit a certain level of return," Sullivan says.
Nonetheless, the raging bull market of the late 1990s raised the pressure on all advisors to perform, and SBSB started to employ more index funds and, in the past few years, exchange-traded funds (ETFs). In the mid-1990s, the firm was not a major proponent of passive investing. At that time, Sullivan's view was that simply because the average fund underperformed its relevant benchmark didn't mean outperforming this yardstick was impossible. With thousands of funds out there, he reasoned that one of his responsibilities was to find those that were significantly better than average.
Today, SBSB uses actively-managed funds as core holdings, composing 30% to 50% of a given client's portfolios. But the actively-managed funds are there to complement the benchmarks and, when possible, outperform them. For example, two of the firm's favorite large-cap funds are Harbor Capital Appreciation, in the growth category, and Dodge & Cox Stock Fund, in the value segment. Combined, the 0.5% return of Dodge & Cox and the -18% return of Harbor Capital Appreciation was about -9%, easily outperforming the -12.2% return of the S& P 500 in this year's first quarter. "Last year, Dodge & Cox was up about 16%, and clients liked having a winner," Sullivan says.
The term super-regional strikes the partners as a bit of a stretch, but they are now much larger than any firm in the Washington area. Sullivan has maintained a close friendship with financial-services consultant Mark Tibergien of Moss Adams LLC in Seattle. Though SBSB has never retained him, Sullivan is now considering it. "Mark says that if you are one of the top three firms in a given market, then you'll get a crack at 80% of the new business," one partner says.
The firm today is a much different place from what it was a decade ago. With 500 clients, none of the partners knows all of them anymore. "The biggest surprise is walking into the lobby and talking to a client, and they know of me, and I know of them, but I don't know them," Blayney says.
But the partners seem to believe that they have built something truly unique that they would like to survive after they retire. Right now, they have little interest in selling or equitizing their business, partly because they still are growing fast and are having too much fun. "Someday, I might be a picture on a staircase," Blayney says.