Kochis Fitz To Merge With Quintile
Two of California's largest independent wealth management firms plan to join forces to become the largest such entity in the state and, they hope, ultimately the largest in the nation.
The merger of Kochis Fitz in San Francisco and Quintile Wealth Management in Los Angeles, announced in November, creates a company with roughly 385 clients and $5 billion in assets. The deal is expected to go into effect on January 1, 2008, and the new company will be called Kochis Fitz/Quintile until a permanent name is chosen. It will be headquartered in San Francisco, and will maintain its Quintile office in Los Angeles.
Kochis Fitz, whose forte is the corporate executive market, has a staff of 33 people serving about 320 clients with total assets of $2.5 billion. Its AUM has grown almost 25% annually since 2004. Quintile, whose focus is chiefly on the family office market, has a staff of 35 employees managing 62 clients with nearly $2.5 billion in assets. Its annual AUM growth rate since its founding in 2002 is 26%.
The principals claim the combined entity will be the third largest independent wealth management and family office business in the nation based on assets under management. Although neither firm disclosed its financials, observers estimated that Kochis Fitz has somewhat higher revenues, since it is easier to charge a client with $7 million in assets a fee of, say, 0.7% of assets than it is to charge the same fee to a client with $50 million.
"This will leapfrog us into a new plateau," says Tim Kochis, 61, co-founder and CEO of Kochis Fitz. "If we do this successfully-and we intend to-we'll present to the industry a new model for a permanent independent wealth management offering."
That model entails complete self-ownership without third-party capital. "We don't want to become part of a larger entity that removes us from the decision-making process," explains Kochis, "or where the economics are driven by proprietary products or service offerings."
Kochis says his firm had been approached many times by a number of possible suitors looking to purchase a stake in the company or to buy it outright, but that they were never seriously interested. Quintile, for its part, had long sought a partner to help expand its national presence, but talks with other family office-type firms during the past two years went nowhere.
Kochis Fitz already has a number of Southern California clients, and Kochis says he always thought that would be the logical place for the firm to expand. During a late-January lunch in L.A. with Quintile executive Bob Wagman, a former colleague of Kochis from their Bank of America days, the conversation drifted toward a possible merger between the two firms. After lunch, Kochis dropped by Quintile's office for a 15-minute chat with Rob Francais, 42, Quintile's co-founder and CEO. That turned into a two-hour meeting that laid the groundwork for the merger.
Now comes the hard part: turning the two organizations into a seamless operation. The firms have assembled task forces from both offices to integrate human resources, governance, marketing, investment platforms and client service offerings.
They don't expect a culture clash. "Principals at both firms are cut from the same cloth because many spent time at accounting firms," says Francais. "We're pretty much culturally aligned from the start."
After the two companies are integrated, the new firm intends to expand both through organic growth and by joining forces with other wealth management outfits around the country. "That's our goal," says Kochis, "but we have no time frame."
As part of the merger, 18 new principals from both firms were named equity participants in the new company, boosting the number of employee-owners of the combined company to 32. "We're giving them an equity stake that gives them an opportunity to share in the business's growth," says Francais, adding that the ages of the 32 shareholders range from the late 20s through the early 60s.
Kochis will be CEO of the combined company until mid- to late 2009 and Francais will be the chief operating officer. He will succeed Kochis as CEO by the end of 2009, when Kochis plans to shift his focus to working with clients and continuing in his role as one of the industry's leading voices.

Practicing The Best Practices
Wealth management is a buzzword in the financial advisory industry, and according to one study there's a good reason for it: wealth managers have better business practices than investment generalists.
The report, "Best Practices of Elite Advisors: The Wealth Management Edge," surveyed nearly 3,000 financial advisors across the spectrum of RIAs, independent broker-dealer reps and wirehouse brokers. Conducted by the financial consulting firm CEG Worldwide and sponsored by Dow Jones & Co., the report defined wealth management as a consultative process that engenders close client relationships and provides customized solutions tailored to individual client needs. Based on the report's criteria, only 6.6% of surveyed advisors' business models fit into the wealth management mold; the rest are investment generalists. In addition, advisors who want to transition to a wealth management model are struggling to determine how to get there and who to tap into for guidance.
Of course, wealth managers are typically thought of as those with high-net-worth clients, and the surveyed advisors classified as wealth managers in this report had amassed average assets under management of $645.2 million compared with $307.8 million for generalists. And they did so with fewer clients-an average of 101 for the wealth managers versus 269 for the generalists.
"When you have 300 clients your day is very reactive to client needs," says Peter Kurey, executive director of strategy and market intelligence at Dow Jones Media Enterprise Group. "You don't have time for more proactive stuff" that generates more income, assets and growth by targeting the right clients.
Among the proactive traits of successful wealth managers is the ability to generate greater numbers of client referrals through more personal contact with top clients, as well as by cultivating client referrals from other professionals, whether through networking or from joint ventures or other strategic relationships. And these prospective clients are often the type with potential to become top clients themselves, not unprofitable laggards who gum up the works.
Kurey says research has found that one of the hardest things for many advisory firms to do is to trim their book of business by discarding unprofitable clients.
According to the report, other key wealth management practices include specializing in a particular type of client, requiring a minimum asset size for new clients, and charging a minimum fee. Additional practices of wealth managers include implementing a formal interview process with prospective clients, providing formal business plans, and providing clients with write-ups evaluating their situations. Wealth managers also outsource a much larger percentage of their money management business.
In short, the report found that wealth managers run tighter, more focused ships that employ practices enabling them to appeal to affluent clients, earn higher profits and manage their practices in systematic and formalized ways. Generalists, on the other hand, appear to be less sure of how to lay the foundations for success and more apt to try various approaches.
The bottom line-at least from a pay perspective-is that the surveyed wealth managers reported an average annual salary of $881,000 versus $279,000 for generalists.
Kurey acknowledges that advisors making $279,000 are doing very well and that many in that pay range are satisfied with the size and scope of their business. But he says the lessons gleaned from the practices of wealth managers can apply across the board. "Middle-market firms can take things from the top market and apply them to their practice," he says.

United Capital Buys Four Advisory Firms
Wealth management firm United Capital Financial Advisers has purchased four advisory firms, boosting both its assets under management and the types of products and services it can offer clients.
Based in Newport Beach, Calif., United Capital in the past three years has built a nationwide network of advisory firms through acquisitions. The latest buying spree, completed in late October, expands the company's size to 14 offices with roughly 3,200 clients and more than $8 billion in assets.
The four new firms are PFE Group, a leading corporate advisory firm based in Southborough, Mass.; Spectrum Assets, Inc., an independent investment advisory firm in Boca Raton, Fla.; Park Cities Financial Group, a brokerage and investment advisory firm in Dallas; and Sapient Wealth Management, a high net worth practice in Stamford, Conn. The company wouldn't disclose the total purchase cost.
United Capital buys 100% of a partner firm's assets. In return, it does all of their compliance work, bill paying, reporting and other nuts-and-bolts operational chores so that the firms can focus on client relationships and growing their business. "We totally integrate these firms," says United Capital CEO Joe Duran.
Duran says that United Capital thoroughly vets prospective acquisitions to avoid any potential bad seeds that could negatively impact the entire organization, and to make sure that new firms will immediately contribute to the overall company's success-and vice versa.
"Our first rule is can we be additive to the firms we acquire," says Duran, "because if we can we know there's financial arbitrage. To have value you have to create value." He notes that acquired firms have boosted their cash flow by an average of 40% within 12 months of being purchased. "We've never had one that hasn't had a double-digit increase."
United Capital traditionally purchases firms with assets between $100 million and $500 million, which was the case with three of the new firms. But they broke the mold with PFE Group, a company with $6 billion in assets whose 401(k) and pension advisory business includes the likes of Pepsico, GMAC and NASCAR. "PFE Group adds a whole new magnitude of services we can offer," says Duran.
Matt Brinker, United Capital's vice president of acquisitions, says more super-sized acquisitions are in the works. "As we get bigger we're able to digest billion-dollar firms," he says, adding that the company expects to announce more acquisitions in the near future.

NASAA Spotlights Compliance Problems
The North American Securities Administrators Association (NASAA) has released an updated series of recommended best practices for investment advisors to help them improve their compliance practices and procedures.
"Our best practices were developed to help regulators and advisers better understand and meet compliance challenges," says NASAA President and North Dakota Securities Commissioner Karen Tyler. "Advisors can use this information to help strengthen compliance programs and minimize the potential for regulatory violations."
Tyler says the best practices were developed after a nationwide series of coordinated examinations this year of investment advisors by 43 state and provincial securities examiners revealed 2,135 deficiencies in 13 compliance areas. The advisors examined included both RIAs and broker-dealers.
Tyler noted that the 2007 examinations found a 12% and 19% increase, respectively, in advisors with registration and books and records deficiencies. The number of advisers with custody deficiencies dropped by 6%.
The top five categories with the greatest number of deficiencies involved registration, unethical business practices, books and records, supervisory/compliance, and privacy.
Mike Huggs, senior examiner with the Mississippi Secretary of State's office and chairman of the project group that oversaw the examination, notes that most unethical business practices related to advisor contracts with clients. "Either they didn't have a written contract or they neglected to mention certain required items" such as fee calculations and non-assignment clauses, he says, adding that roughly 40% had problems with their advisory contracts.
Based on the results, NASAA recommends the following "Best Practices":
Review and revise the Form ADV and disclosure brochure annually to reflect current and accurate information.
Review and update all contracts.
Prepare and maintain all required records including financial records.
Prepare and maintain client profiles which show suitability information.
Prepare a written compliance and supervisory procedures manual relevant to the type of business.
Prepare and distribute a privacy policy initially and annually.
Keep accurate financials. File timely with the jurisdiction. Maintain a surety bond if required.
Calculate and document fees correctly in accordance with contracts and ADV.
Review and revise all advertisements, including Web site and performance advertising, for accuracy.

Herd Mentality Linked With Keeping Up With The Joneses
Why do people act like a herd around risky investments, causing "bubbles" that inevitably burst and leave most investors losers in the game?
Two Stanford researchers say that what investors fear the most is not the risk of a loss per se, but the risk that they may do poorly relative to their peers. That means even though investments in areas such as new technology may be particularly risky, investors tend to cluster around such pie-in-the-sky opportunities to avoid being the only one in the neighborhood to miss out on the "next big thing."
In three related theoretical studies published by the Stanford Graduate School of Business, Peter DeMarzo and Ilan Kremer, along with Ron Kaniel of Duke University, have discerned that individual investors care deeply about how their level of wealth compares to that of others in their peer group and community. "Investors fear being poor when everyone around them is rich," says DeMarzo, Mizuho Financial Group Professor of Finance at the GSB.
A primary reason for people's concern, they explain, is that the cost of living in any community may depend on the wealth of its residents. The more money people have, the more expensive houses, real estate, day care, and other necessities and amenities will be. "It's worse to have a lower income in an area where everyone is wealthy than it is in an area where everyone has a similar income as you," says Kremer, GSB associate professor of finance.
The researchers have found that such external worries have implications for how people invest. They motivate people to choose portfolios that look a lot like those of others in their community or professional cohorts. "Such herding around certain investments allows you to combat the fear that everyone else might be betting on the winner while you're not," says DeMarzo.
They also found that investors tend to herd particularly around high-tech investments that have the potential to revolutionize the entire market and promise a big upside--technologies like fiber optics, Internet-related infrastructure, and so forth. "These are typically high-risk stocks that, in seven out of eight cases, are likely to go bust. But people are willing to invest in them in the hopes that they'll hit that one-in-eight jackpot," says DeMarzo.
This phenomenon explains how stock bubbles emerge. People begin crowding to certain investments, and the price of the assets they hold becomes overinflated.
To learn more, visit http://www.gsb.stanford.edu/news/knowledgebase.html.

X Marks The Spot
Generation X is stereotyped as a slacker generation of self-absorbed mopers. But look again, as the people born between 1965 and 1979 are all grown up and are making their way in the world as they acquire assets. They're also concerned about their financial future, and they're shaping up as the next wave of potential clients for financial advisors.
According to MainStay Investments' Across Generations research, Gen Xers are advancing into leadership positions across the public- and private-sector realms, and are rapidly emerging as a generation of mass affluent and high-net-worth individuals.
MainStay Investments, the retail arm of New York Life Investment Management, has more than $20 billion in assets under management. Its survey included 1,512 people across four different age groups with at least $250,000 in investable assets.
According to MainStay, 60% of Gen Xers want to get to know their parents' financial advisor, and 55% of them who have an advisor already would encourage him to speak with their parents about financial planning and wealth transfer issues. MainStay's research found that Gen X is squarely in the accumulation stage of their investing cycle, and that their top need for financial advice centers on investment planning. But their second most pressing need is retirement planning, reflecting a realization that they'll have to be more responsible for their retirement financial needs than was their parents' generation.
Surveyed Gen Xers were distrustful of the "hard sell" salesperson approach to financial advice.