Unlocking Real Value Blog

Wirehouse Poaching Fuel’s Young Firm’s Growth

Published inFUNDfire – An Information Service of Money-Media, a Financial Times Company
By Tom Stabile

Two former UBS Financial advisors recently joined the ranks at HighTower, a Chicago-based boutique brokerage start-up that is aiming to “double or triple” its roster in the next two years by poaching from the wirehouses. Christopher Davis of Virginia and Matthias Kuhlmey in New Yorkjoined separately from UBS, bringing the firm’s tally, in a little over a year of operation, to 17 advisors with about $15 billion in assets – including 10 teams from the wirehouses or other big-name brokerages.

“We’ll have new people coming aboard in December or just after the New Year,” says Elliot Weissbluth, HighTower’s CEO. “We expect to be at between $50 billion to $100 billion in assets in the next two to four years.”

The goal sounds ambitious, even though the firm has said it is focusing on advisors with $300 million or more in client assets. It added a big chunk of its assets this year with a single advisor team led by Richard Saperstein that had run about $10 billion in client accounts at Bear Stearns.

But Weissbluth says HighTower expects to grab its fair share of the increasing number of large-book wirehouse advisors who are leaving the brokerage environment. The absolute number of advisors leaving remains small – in the hundreds – out of the universe of more than 50,000 wirehouse advisors, but it has nevertheless been growing rapidly.

“The wirehouses are our core target,” he adds. “We look for the elite brokers inside the wirehouses who have made the decision they would like to leave. We want to be on their short list.”

The idea that wirehouse advisors are willing to move is fueling business initiatives at dozens of custodians, managers, advisory firms, and service providers this year. And on Friday, Charles Schwab & Co. released the results of its survey of 200 wirehouse advisors about their attitudes on leaving the brokerage world for an independent firm, and it found that nearly half would “consider” such a move. Schwab is a large custodian that aims to attract brokerage advisors who decide to go independent to its platform. HighTower uses the platforms at Schwab and another large custodian, Fidelity Investments, for investments, custody and other services.

HighTower’s own traction was rapid in its first six months as it added 15 advisors through May. It had a dormant recruiting stretch until adding the two UBS advisors, but Weissbluth says the pause was planned because HighTower undertook a time-consuming effort to set up a clearing infrastructure through JPMorgan, particularly to benefit Saperstein’s large practice.

“That was a big operation,” Weissbluth says. “We decided to allow for JPMorgan and HighTower to have a sufficient amount of time to make sure the infrastructure was working well between the firms. We decided to build instead of trying to build and grow at the same time over the summer.”

The HighTower model appears to promise good results, particulary because it offers an equity stake and share in the firm’s growth, says Andrew Klausner, principal at AK Advisory Partners, a Boston-based consultant. He refers to HighTower’s structure that assigns 25% of the firm’s equity to advisors who come in as partners, with shares allotted by the size of the incoming recruit’s book of business.

“I think the concept has legs,” Klausner says. “The equity option appeals to people.

HighTower’s model also calls for providing the advisors with infrastructure, platforms, and product access similar to what they had at the wirehouses, which is different than the effort required for advisors who go fully independent and start up from scratch. Klausner says having a business infrastructure in place is likely appealing to a wirehouse advisor who is eager to leave but doesn’t want to mind the details of running an office.

Klausner says he has seen other start-ups using this model, including the “equity kicker,” but none have yet matched HighTower in recruiting results. The firm now has eight locations, including “corporate offices” in New York and San Francisco that are equipped to bring in additional advisors, as well as five other offices based around regional teams in other cities.

One of the recent UBS recruits highlights another focus of the HighTower model – bringing in advisors with specialties that can in turn be offered to the clients of other partners at the firm. Kuhlmey brings over a specialty in global asset allocation and international banking, having worked as well at Julius Baer and Deutsche Bank’s private banking operations. His experience includes extensive buying and selling of foreign ordinary securities in native country currencies, an arduous process that many U.S.-based advisors don’t follow but which can offer significant benefits to certain clients.

That example adds to Saperstein’s cash management specialty and to others at the firm who focus on fixed income, Weissbluth says. “The HighTower strategy is to find really high-quality advisors, and many have developed differentiated practices,” he adds.

He says “information arbitrage” stemming from the partnership structure allows advisors to share their expertise with clients of their colleagues. Such occurrences call for the advisors to coordinate both with HighTower’s CFO to establish a revenue-sharing model as well as with the firm’s compliance team to ensure clients are well-informed about the arrangement.

AK Advisory’s Klausner says a specialist model should succeed at a firm where advisors shareequity. “In the brokerages, you’re typically relying on the home office resources,” he adds. “Here, you are relying on other producers who are experts. And, typically, in a wirehouse you’re not compensated to help anybody else. But when you have an equity stake, you have a direct incentive to grow the base of the business.”

HighTower’s recruiting haul so far also includes advisors from Morgan Stanley, Merrill Lynch, and Goldman Sachs. Weissbluth says the advisors get most external investment products, including separately managed accounts, from Schwab and Fidelity platforms or dual contract relationships with managers.

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