A few years ago in Boston, John LaPann faced the classic entrepreneurial conundrum. How would the advisory firm he had founded in 1991, Federal Street Advisors, in which he held majority ownership, continue beyond his involvement?
“I was in my early 60s and had promised our clients that we’d serve them over multiple generations,” he recalls. “We had a really good team of senior professionals and needed to figure out how to transition ownership of the firm to ensure continuity for the client families.”
He knew that attracting and retaining quality professionals is essential to success in the smart advisory business. “In order to do that, younger professionals need to be able to acquire equity. Equity has to be broadly distributed,” he concluded.
For that, though, he would need a bigger firm—a larger pie to split up. “We had really fabulous professionals in their late 20s and early 30s who needed a firm large enough, and growing fast enough, that they felt there were opportunities for them. So the notion came around that if we were going to achieve this continuity for the families, one way to do it was to team up with another firm and also do it in a way that would allow us to improve how we serve our clients and make us better for their benefit,” LaPann says.
Spreading equity among staff was already a practice at Pathstone Family Office, based in Fort Lee, N.J., with offices also in Atlanta and Naples, Fla. Eventually, through a methodical process by both firms that included multiple considerations, the two joined forces as Pathstone Federal Street on January 1, 2016, with the shareholders from LaPann’s outfit eagerly accepted as partners in the new organization.
“Our goal is to make Pathstone Federal Street a career destination,” explains Matthew Fleissig, the firm’s president. “For us, the hardest part of growing from here is attracting and retaining talent. We want to have long-term partners who are personally fulfilled and economically rewarded, and we’ve set up structures that allow that.”
Invitations to buy into the firm are extended to the firm’s top performers. “It’s not just the advisors. Whether they’re in research or operations or reporting, we have partners from all different walks of the business,” Fleissig says. Of the firm’s 107-person team, 32 are partners. The equity’s value is formula-driven and there is a regular dividend.
The other side of the coin is that taking new owners from within the organization gives veterans such as LaPann, who is now 67, a way to cash out while keeping the firm independent.
“The equity is transacted between partners, approved by the board, from the older generation to the younger generation. That is the exit strategy,” Fleissig says, adding, “Having a market for the equity inside the firm allows us to maintain our independence as a private company. We want to be able to execute on what’s best for the employees and the clients.”
The firm’s board consists of Fleissig and LaPann plus co-CEOs Steve Braverman and Allan J. Zachariah, both of whom had successful stints at Harris myCFO along with Fleissig.
Convergent In Crisis
Pathstone Federal Street morphed into its current state on November 1 with an asset purchase that was also driven by a need to share equity. Yet the deal involving Convergent Wealth Advisors might never have occurred were it not for the October 2014 suicide of its CEO, David Zier, who had been suspected of fraud relating to a side fund he managed away from the firm.
The tragedy plunged Convergent into a tailspin. “Clients had left and the firm’s great talent was at risk of walking out the door. If you don’t keep the talent, you’re not going to keep the clients,” says John Elmes, who was brought in as president of the struggling operation in May of 2015.
At the time, Convergent was owned by City National Bank in Los Angeles, known as the “Bank to the Stars” for its Hollywood clientele. “City National recognized that they had an affiliate in trouble and wanted somebody with experience to issue-spot, be open-minded and to see what could be done to make it successful,” says Elmes.
He certainly had the background for the task. He was part of the GenSpring Family Offices team that was mandated to double the firm’s size every five years, and did. He’d also been a partner at Arthur Andersen in the private client group and a managing director at J.P. Morgan Private Bank.
When Elmes took over at Convergent, first on his agenda was figuring out how to hold onto the personnel. “This is a talent-based business and it truly is a rush to get the best talent. There is not an enormous inventory out there of credentialed professionals with in excess of 10 years’ experience who know the ropes of advising complicated, multigenerational families,” he says.
Elmes eventually concluded, like LaPann had, that to retain key employees they would have to own a piece of the business. “That’s how you really align it with the clients. But there was no way to do that with the bank owning 95-plus percent,” Elmes knew. The way forward would have to be transformational.