From the September 2007 issue of Wealth Manager Web • Subscribe!

Different Strokes

Conventional wisdom decrees that the preferred business model for wealth managers is to operate as an independent registered investment advisor without any broker/dealer ties. Indeed, many independent RIAs believe that theirs is the only model capable of delivering genuine wealth management services. To some extent, it's a David versus Goliath scenario. Mark Tibergien, a principal with Moss Adams LLP and chair of the firm's Securities and Insurance specialty group in Seattle, notes that while there are 15,000 to 18,000 RIA firms in the country, there are several hundred-thousand registered representatives. "RIAs are getting a lot of attention, but the reality is that it's a small segment of the total industry," he says. And advisors who work with the big firms believe the independent RIA model is not the only place where wealth management can thrive.

Are they right? Are big firms a viable setting for delivering wealth management to high-net-worth clients? Tibergien believes that in many respects they may be more viable. His firm's research has found that the typical independent RIA outsources some functions of their operation because they are in some way capacity-constrained for a substantial portion of their business. In contrast, large firms provide a level of infrastructure that many small RIAs lack. "One advantage of being affiliated with a large broker/dealer organization is that they have sufficient critical mass that they can invest in those solutions to help the typical advisor," Tibergien says. "It may be in the areas of advanced planning or due diligence on alternative investment solutions, for example. In other words, they could make a profound impact on many of these organizations in areas of practice management."

In contrast, Stephen Winks, chairman of Portfolio Construction Technologies in Richmond, Va., argues that brokerage firms cannot provide wealth management to high-net-worth investors--that the brokerage industry is, by its very nature, sales-and marketing-driven. The firms are constrained, he believes, by their approach to wealth management as a product or a series of products rather than a process that is managed. "I think that the whole concept of wealth management is a mechanism to help the brokerage industry be competitive relative to advisors who really are in the wealth management business," he says. "I think the brokerage industry understands and highly regards the whole wealth management concept, but the unfortunate limitation is that they can only go as far as they can go."

But Tibergien points out that it's important to recognize that the large firms are not just brokers: They are financial services firms. Consequently, their advisors have access to a wider array of services and products than many independent RIAs. That access has been an important factor behind Brian Strachan's decision to stay with large firms during the course of his career. Strachan is a Managing Director--Wealth Management and Senior Investment Management Consultant with Citi Smith Barney in Boston. He heads the Strachan Group, which also includes a second wealth manager, an investment analyst and two administrative assistants.

The Strachan Group works with 50 wealthy families with more than $900 million of assets under management, basing its services on the family office model. In addition to investment management, the group provides a full range of financial planning advice and also assists clients with bill paying and obtaining loans and credit. The Smith Barney affiliation enables Strachan to call on experts within the Smith Barney/ Citigroup family office for technical advice as needed. And there have been occasions, he admits, when he has been surprised at the scope of resources available within Citigroup. "We had a client in Israel who wanted to set up a flexjet arrangement. I didn't realize when I came here that Citigroup has an airplane division: They lease and lend money for planes, and they can tell clients which planes are good to buy."

Strachan spent 18 years at Merrill Lynch before joining Smith Barney in 2005. When he began to consider leaving Merrill, he evaluated the independent RIA option but chose to stay in the large-firm environment. The lure of owning his own firm was tempting, he admits, but ultimately he found that Smith Barney's services matched well with his business model. He also believes many of his clients prefer working with a large financial services company. "Time will tell whether it was a good or bad decision," he says. "But I've found that the services the client has in a big firm are difficult to recreate in the smaller firm."

While it is common to find an advisor who left a large firm to start or join an independent RIA, it's unusual to find a career path that has gone in the opposite direction. One such advisor--who was unable to speak for attribution--started his career as a mutual fund manager before joining an independent RIA. A CFA charterholder, this advisor spent six years as the RIA's chief investment officer. Then, several years ago, he moved to a large financial services firm. His client accounts average over $1 million, and he adheres closely to a wealth management process in designing client portfolios.

This advisor firmly believes that his affiliation with a large firm improves his ability to assist clients. In his previous experience, the RIA's platforms were more limited than his current employer's. "When I worked on the RIA platforms, I strictly looked at no-load funds and didn't realize how narrow a universe that was compared to all funds out there. I now have a wider spectrum of managed accounts, international currencies, and a large selection of alternative investments for clients, so I am able to incorporate more asset classes for broader diversification. I can also look at the insurance issues and the lending side to see if I can help clients there."

He still sees value in the independent RIA model, which he believes is well suited for smaller accounts. Higher-end clients need more sophisticated solutions, he argues, and the larger firms have the more sophisticated resources to meet those needs.

A recent report from Prince & Associates supports that notion. According to the survey, only 1 percent of investors with portfolios valued between $5 million and $10 million invested in mutual funds. Among ultra-high-net-worth investors--defined as $20 million-plus--none invested in mutual funds, but a third invested in startup companies and two-thirds invested in hedge funds. Asked whether he has experienced any pressure to push in-house products, the advisor reacted strongly: "I've had zero pressure to push any proprietary product," he says. "There has been no incentive given to me to push proprietary products, either."

Several of the larger independent broker/dealers offer advisors multiple affiliation models. For example, advisors can choose to operate under the corporate RIA or maintain a separate RIA while using the broker/dealer for securities and insurance transactions. Mary Margolis, CFP, CPA/PFS and her partner, Deborah Stavis, CFP, founded Stavis, Margolis Advisory Services, Inc. in 1996 in Houston. They decided at that time to create their own RIA but to retain a broker/dealer relationship with FSC Securities Corp. Working with clients whose taxable estates exceed $4 million, their assets under management grew from $70 million in 1996 to approximately $1 billion by mid-2007. In 2005, Stavis, Margolis became a wholly owned subsidiary of Compass Bancshares, a regional bank.

Margolis describes her company as a "full service financial planning firm" that receives several benefits from its affiliation with FSC Securities. Every year an FSC audit team conducts a mock audit to ensure that Stavis, Margolis is fulfilling its compliance requirements. The affiliation also allows Stavis, Margolis to sell variable life insurance products, and Margolis says that FSC's access to mutual funds and money managers has been a valuable resource in expanding her firm's investment options. She believes the combination of an independent RIA and an independent broker/dealer has been the ideal solution for her firm's clients. "There are a lot of people out there who call themselves fee-only, and I think they wear that label as if that means that they alone have the clients' best interests at heart," Margolis says. "[But] if you have your practice structured such that you can only offer some solutions and not others, I think that that could be construed as being biased, as well."

Raymond James Financial Services, Inc. offers several affiliation options, ranging from traditional employee to independent RIA. Greg Ghodsi spent 10 years with Robert W. Baird & Co. before joining Raymond James in early 2007. After evaluating the options, he decided to affiliate as a traditional employee and work solely under the corporate RIA. His four-person team operates from a separate branch in Tampa as the 360 Wealth Management Group of Raymond James & Associates.

Ghodsi works primarily with business owners, many of whom hold $5 million-plus portfolios that include significant bond holdings. When Ghodsi was evaluating his business-model options, the ability to shop for competitive bond prices was an important factor. If he were to manage clients' bond portfolios as an RIA, securities regulations prohibit him from buying bonds from Raymond James' inventory as a principal trade, even if the in-house price is lower than the street price. As an agent (that is, a broker) charging a per-trade commission, however, he can buy the lowest-priced bond available from any firm's inventory. That might not sound like a significant issue to advisors who don't trade bonds for clients, but for those who do, the savings can be significant over time. "When you multiply that by a hundred clients and all the bonds we manage, that to me was a pretty sizeable issue," says Ghodsi. "That's why I chose to operate in the employee model."

On the other hand, Kevin Meehan, CFP, CLU, has operated a hybrid model through Raymond James' independent contractor division for the past seven and a half years. His firm, Summit Wealth Advisors LLC in Itasca, Ill., is a state-registered investment advisor with three advisors and four support staff. Most of Meehan's clients fall into the $1 million to $5 million portfolio category, although a growing number are above $5 million. Financial planning and consultation fees are paid to Summit Wealth Advisors, but the Raymond James corporate RIA collects investment management fees.

Meehan admits that the dual-RIA model is somewhat confusing. Nevertheless, he believes the affiliation gives his clients access to services and products such as investment banking and industry research specialists, which they might not have if he were operating solely as an independent RIA. Pressed to describe drawbacks to the relationship, he points to the increasing amount of time Raymond James requires for compliance-related activities; otherwise, he says, the model has worked well for him and his clients. "We have never really felt any significant limitation as to services that we can bring to our clients," Meehan says. "I don't feel like we have any less flexibility than other RIAs."

Finally, looming over the entire discussion is the recent court ruling on fiduciary responsibility. In the opinion of Portfolio Construction Technologies' Winks: "If you're offering wealth management and are not acting in a fiduciary capacity, you know you aren't really offering wealth management."

Without exception, though, the advisors interviewed for this article maintain that they provide genuine wealth management regardless of their fiduciary status at any particular time. And in fact, the processes they follow appear identical to those used by their independent RIA peers. Moreover, their growing businesses appear to support their assertion of delivering the real thing. "People don't attain a net worth of $10 million or $20 million by being stupid," observes Ghodsi, the advisor who chose Raymond James' traditional employee route. "If you're not delivering wealth management, they're going to find it from someone else. It's up to the advisor to execute, whether he's in an RIA channel or... at Merrill Lynch, Raymond James or LPL."


Imagine having a team of first-class financial analysts delivering morning reports on everything from macroeconomics to the value of a corporate stock pick--not just to your PC, but to those of your best clients as well. Sound like value-added to you?

That's exactly how John P. Fitzpatrick, a UBS senior vice president-investments in Port Jefferson, N.Y., feels when UBS Wealth Management Research goes into action every weekday. Starting with Howard Liberman's 7:30 a.m. 'Morning Call'--repeated throughout the morning on the UBS network--and a daily research page which can be printed out or emailed to clients, the service includes opportunities for one-on-one conversations with people like Andreas Hoefert, UBS' chief global economist; senior equity strategist and CFA Jeremy Zirin, and Michael P. Ryan, CFA, head of UBS Wealth Management Research, Americas and the firm's former Chief Fixed Income Strategist--not to mention several sector analysts who are also available to the program.

Of course advisors and their clients can get research through myriad sources--solicited and unsolicited, paid and unpaid, some of it through UBS channels. So what makes this program unique?

"This is a dedicated team, dedicated to our financial advisors and their individual clients," says UBS spokesperson Karina Byrne. "Wealth Management Research has a different focus and caters to different needs than the research we offer to our institutional clients through UBS Investment Bank."

In addition to its advisor/client-friendly reports, WMR also produces UBS Life Themes, research focusing on topics like retirement and college funding that relate directly to the financial concerns of individual investors.

"This is a service for us and our clients," says Fitzpatrick. "And because it's meant for the wealth management client, it gives us more value."

Fitzpatrick believes the program, which has been in effect for about a year, will also be a great recruiting asset--good news for UBS which, observers report, has been aggressive recently in recruiting brokers and financial advisors with the goal of expanding its private wealth management presence in the U.S.

Fitzpatrick, however, needed no such incentive. In fact, he began his career at PaineWebber "straight out of college" in 1984. Although he left to join Prudential after seven and a half years, he returned to PaineWebber just over a decade ago, remaining through the acquisition and re-branding that created UBSPW and finally, UBS.

"It's a good firm and I like having the name recognition--which PaineWebber also gave us," says Fitzpatrick, who manages $250 million in AUM for about 250 households.

"We have a lot of independence on products, and [a lot of] products such as loans--the complete suite of financial services whether it's bridge financing or mutual funds. We have PACE--which stands for Personalized Asset Consulting & Evaluation--and contacts. Take our municipal bond desk. Say you have a client with a sizable municipal bond order; you call the desk, and their people look for suitable new issues."

Fitzpatrick's brother has been with him in the practice for 10 years, and two years ago Fitzpatrick's wife joined them in what appears to be a growing trend toward advisors who keep the business in the family. They share the office in suburban Long Island with Stephen Anglim, a college friend who has practiced with Fitzpatrick from their post-grad cold-calling days. "We're partners in every way--except revenue sharing," Fitzpatrick laughs.

"[The cold-calling route] wouldn't happen today," Fitzpatrick reflects. "Today firms want five years of sales experience." For the most part, he likes the way the business is trending. "I never really liked trading stocks, so financial planning is much more enjoyable for me," he says. And he has no problem with the trend towards working in teams. After all, he points out, "Our team is UBS."--Nancy R. Mandell

Ed McCarthy, CFP, is a freelance writer in Pascoag, RI.

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