HighTower Advisors expects its newly announced HighTower Network, its broker-dealer/custodian affiliate, to land its first several teams of advisors who will not be equity partners with the firm over the summer. The new network platform, announced last fall, represents a new venture for HighTower, which has built itself into a juggernaut capitalizing on the breakaway broker phenomenon.

Over the last five years, firms like HighTower and Dynasty Financial Partners have adopted slightly different approaches to building a business essentially based on lifting corner-office teams from the nation’s largest wirehouses.  HighTower’s initial platform offered fiduciary-minded teams a chance to earn equity in the company and made them employees. It also created an environment that made the transition out of giant firms, where top brokers were often pampered with numerous services, as seamless as possible. With its new network, HighTower enters a lower-margin business with potentially more scale and revenue. Given that HighTower’s existing platform has largely been built and its fixed expenses accounted for, its barrier to entry isn’t that high.

The market for breakaway brokers has long been dominated by independent broker-dealers with other target advisor segments as well, including LPL Financial, Raymond James Financial Services and Commonwealth Financial Services. Still, the fact that these longtime players continue to see a steady stream of brokers looking for a different kind of home, while HighTower, Dynasty and the major custodians have thrived recruiting advisors in the same space, speaks volumes about how fertile it is.

HighTower won’t disclose its financials, but the firm is believed to have reached profitability two years ago and its revenues may have topped $100 million. The firm’s chairman, former Charles Schwab & Co. CEO David Pottruck, acknowledged that an initial public offering was probable in the next few years.

“We don’t think of an IPO as a goal,” Pottruck says. “It’s a goal line or a hash line on the [football] field and it’s just a change in the capital structure.” Client satisfaction remains the firm’s top priority.

Named America’s 13th fastest-growing small company by Inc. magazine, HighTower nevertheless is approaching a size with $11.3 billion in assets under management as of December 31, where growth in the high double digits becomes unrealistic. “The most obvious challenge is scaling up,” says Pottruck, who still remembers what it was like when Schwab tripled in size every three years in the 1990s.

Despite reports that the exodus from wirehouses has moderated as the bull market accelerates and investor interest perks up in 2013, HighTower CEO Elliot Weissbluth doesn’t see it. “The reality is the opportunity in the market is so big that we can’t capture all of it” with the company’s original business model, Weissbluth contends.
Therein lies the reasoning behind the HighTower Network. Weissbluth maintains that the firm was unable to accommodate all the breakaways who wanted to bolt.

Unlike brokers who join HighTower Advisors, those who affiliate with the network will not receive equity or become employees. Instead, they will own and operate their own businesses in a structure similar to advisors who affiliate with an independent broker-dealer or custodian.

Geography is one determinant of which platform brokers can join. HighTower Advisors operates offices in 24 cities located in 13 states. Most are centered in such major metropolitan areas as New York, Los Angeles, Boston, Dallas, Chicago, San Diego and Philadelphia.

The network will seek affiliates in what big-city chauvinists might call second-tier cities, such as Cincinnati, San Antonio and Albuquerque. Pottruck and Weissbluth avoid that term, countering that there are just too many opportunities to capitalize on all of them with a single business model.

Despite claims that 2013’s roaring bull market has muted the restless tendencies among wirehouse brokers, both Pottruck and Weissbluth say there has been no fall-off in interest from advisors at the giant firms. However, they acknowledge that HighTower advisors, like those at other firms, are seeing a big increase in business this year. “Clients are coming back into the market, but they are doing it in a cautious way,” Pottruck says.