From the May 2003 issue of Investment Advisor • Subscribe!

The Return of Peter Mangan

The former Jack White and Waterhouse exec starts u

Peter Mangan is back, and he is looking to run a custodial business catering to independent advisors again. Only this time, Mangan owns the firm. Mangan ran the advisor division of Jack White & Co. in the 1990s. In 1998, after Waterhouse acquired White, Mangan served for two years as the president of T.D. Waterhouse Institutional Services before being tapped to run Waterhouse's mutual fund supermarket. About a year ago, Mangan left Waterhouse to move his family back to San Diego, and now he has resurfaced to run Shareholder Services Group.

Why would you start a custody firm for RIAs in the middle of a bear market when the established firms in this market are struggling? With the market in the tank and with Wall Street analysts discredited and wirehouses up and down the Street having their names dragged through the mud, it may seem like a terrible time to start a brokerage firm. But we think the timing is perfect. Individuals who have been burned by the market and who have lost value in their portfolios realize they cannot do it on their own. People relying on wirehouses for advice realize their research and advice will only be as good as the brokerage firm allows it to be, and many of them have been found to have been compromised.

Independent advisors are what people are looking for, and we're only in the first inning of that game. The brokerage firm we're starting will capitalize on these undeniable market trends. We have the full array of brokerage services. That is, access to all equity markets and securities, a mutual fund supermarket, fixed income and options as well as money markets, check-writing, and debit cards.

We have not yet fixed prices on trading, but we are planning to be neither the most expensive nor the least expensive. To make a trade, you call our 800 number to our staff in San Diego, where we have four staffers handling these calls. We know the San Diego labor market in this industry and have hired capable people who have worked with advisors in the past.

Aren't there already enough custodians? Why would advisors use you? We are a brokerage and custody services provider exclusively for financial advisors. We won't market to individuals. We won't sell investments or advice directly to investors. This is part of our corporate charter. So when an advisor's client looks at a statement from us, they see Shareholder Services Group in one corner and the advisor's name in the other corner. The client won't have any deep connection with SSG.

We're just a vendor that sends out the statements for their advisor, and we want it that way. We have been in this industry long enough to know that investment advisors need a place, and demand a place, where they know their business will be protected and where the relationships with their clients will be secure. So our mission is to provide services only to advisors and never market to individual investors. We want to be the most trusted custodial firm for independent financial advisors.

You are clearing through Bank of New York. Firms like Schwab, Fidelity, and Waterhouse are self-clearing. So you are imposing a fee as a middleman that they do not need to impose. How can you effectively compete? Bank of New York acquired Pershing earlier this year, and the combined firm is by far the largest clearing firm out there, which keeps our costs low. But a clearing firm does not provide discrete services to the underlying customers. We do. If you are self-clearing, you have some costs that you don't have as a correspondent of a clearing firm.

Think of the overhead that goes along with being in the clearing business: a full margin department, a seat on an exchange, data processing, producing statements. A lot of the overhead does not bring revenue to the bottom line or is irrelevant to being a broker for RIAs. By not being self-clearing, we don't have the same expenses and can work more efficiently in our niche. At Jack White, we cleared through Pershing for years and we know the costs. Our advisor division at Jack White was profitable. It was the crown jewel of the operation. So we've have had experience clearing through firms like Pershing and BONY.

One of my partners is Bob Reed, who has 38 years in the business. Bob and I started out as 50-50 partners and we intend to maintain control going forward. Bob is our chief operating officer. He and Jack White were two lonely brokers when they started their firm in 1978, and Bob was in charge of operations as the firm grew. He was responsible for the day-to-day management and handled the growth and financial controls. And our other two partners each have more than a dozen years in the RIA custody business. We think knowing the business, the low cost of technology and our understanding of the service model are the main ingredients needed to be successful.

Yes, but advisors are very tight with money, especially now. If you can't be the lowest-cost provider and don't have scale, how can you compete with the giants in the custodian business? Price is not the only issue for advisors. If they just want a cheap trade, there are a number of places to go. But they are typically looking for experience, quality service, and credibility. Obviously, you need to be competitive and have technology, but what you need is quality of service and experience and our charter is not to take business away from you. We expect advisors to move assets to us. We think there is enough concern about the competition issue and custodians competing with RIAs that many advisors will want to move assets to us. Maybe not en masse, but there is enough movement of new assets that it will allow us to drive our growth. New assets are coming to independent advisors because people see the conflicts of interest at wirehouses and they are more fearful of managing their own money because they are concerned about their retirement. Those trends are real and strong.

The sort of advisor we're looking for is probably not managing $500 million, but is smaller-from the startups to $150 million or so under management. If we have 50 to 100 advisors sign on with us in 12 months, we will be on a good track. We won't want to attract every advisor and grow too quickly. And figuring they will each move around $10 million on average to get started with us, we think it may be possible to attract $500 million to $1 billion in the next year. That's enough for year one for us. And we can provide high-quality service and earn a profit on our very first customers.

The credibility of our people, and the fact that we won't ever compete with our advisor customers for their clients, will attract a number of advisors right from the get-go. And we don't need to be the largest firm in this business. We just need to provide quality service and good value.

We believe in what independent advisors are doing and want to help them to do it right. The margins are small and you do need lot of volume, but you can provide good service even as a startup. And if you can live on the small margins at the beginning, you can grow from there.

How can a startup build a credible technology platform that will satisfy advisors, who are demanding entrepreneurs who want everything done just right for them? We know what we're doing and where to spend money first. The technology costs of being in the business have come down dramatically and have lowered the barriers to entry unbelievably. A server that cost $150,000 eight or nine years ago now is not worth $1,000, for instance. Moreover, the basic technology to support the custody business now essentially comes in a box sold by clearing firms. We are starting out of the gate with a package that allows an advisor to trade and download his or her data over the Internet. The advisor can view the accounts online and their clients can view their accounts online, and we can lease that and not own it, which has economic advantages.

We want to build on this starting point over time to get to most complete features and functions. But right here from the start, we will be able to do everything that the vast majority of advisors needs: execute an investment plan, monitor it, give clients access to view it, and provide statements and confirmations and ongoing customer service. Advisors are able to download data to run reports, and over time we build the additional functions to provide more services and technology so they don't have to spend their time and capital on producing reports or managing data. We will build out a technology platform that will be tailored to the independent advisor as time goes on. We are already planning to build a Web-based financial planning system into our back office, and considering the integration of a portfolio reporting system.

Editor-at-Large Andrew Gluck, a veteran personal finance reporter, is president of Advisor Products Inc. (www.advisorproducts.com), which creates client newsletters and Web sites for advisors. He can be reached at agluck@advisorproducts.com.

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