From the September 2008 issue of Investment Advisor • Subscribe!

September 1, 2008

Who's Your Daddy?

Palaveev's new gig foreshadows the future of independent advice

Maybe it's just me, but when one of our industry luminaries leaves their well-established position to take on a new job, it piques my curiosity. Notable examples include when Chip Roame left his gig at Schwab to start up Tiburon Advisors, or when Moss Adams guru Mark Tibergien jumped ship to become CEO of Pershing Advisor Services.

Most recently, the defection of Tibergien prot?(C)g?(C) Philip Palaveev from Moss Adams got my attention. Following in the wake of Tibergien leaving last fall, the announcement of Palaveev's leaving and colleague Rebecca Pomering moving over to become CEO of Moss Adams's wealth management division created serious doubts throughout the advisory community about the future of Moss Adams's once industry-dominating consulting division. At the time of this writing, the fate of Moss Adams's advisory consulting is still not clear, but sources tell me that an announcement is imminent.

The scramble to fill the void among support services for independent advisors left by whatever is going on at Moss Adams is a story that will probably take years to resolve. In the meantime, I'm equally curious about Palaveev's new gig as president of Fusion Advisor Network. It seems that Fusion was one of his clients as consultant to many (if not most) of the leading institutions that service financial advisors (B/Ds, custodians, etc.). Yet of all those industry leaders, of which he has extensive knowledge, the highest-level contacts, and undoubtedly some pretty attractive opportunities, Palaveev chose five-year-old, $2.5-million-in-annual-revenues, virtually-unknown Fusion. I believe the reasons behind his choice go far beyond a simple career decision, offering a penetrating look into the future of support services for independent financial advisors.

Palaveev says he wanted to use the knowledge he's accumulated in years of studying advisors to more directly support advisors themselves. "Working with advisory practices gives you a degree of satisfaction that larger institutions don't," he says. "You can really have an impact, one that you can see, and then you can go out and have a beer with them. I very much enjoy the interaction on a down-to-earth, personal level, and having long-term relationships. I feel like I've gone from transactions to fees."

Going Direct

Founded in 2003 by Stuart Silverman (with Palaveev's help), Fusion Advisor Network's mission is to provide the quality and quantity of support services to independent advisors that are lacking in the offerings from their current broker/dealers or custodians, all at a reasonable cost. Silverman's brilliant vision was that by attracting a critical mass of advisors and client AUM, one could negotiate better terms with all the vendors that provide services to those advisors--so much better, in fact, that the savings would more than pay for the cost of belonging to the Fusion network.

Preferring to simply focus entirely on servicing its advisors rather than on the securities business, Silverman decided against Fusion becoming a broker/dealer. Consequently, Fusion's first challenge was to find a B/D with which its advisors could affiliate. That's harder than it might sound. For one thing, most B/Ds delude themselves into believing that they already provide a high level of services to advisors (ironically, creating the very problem that Fusion wants to solve). For another, since B/Ds make their profit by keeping payouts as low as possible, let's just say they aren't very excited about a partner who wants to band advisors together to negotiate the highest payout possible.

Despite these barriers, Silverman and Palaveev found the perfect partner in National Financial Partners. Palaveev assures me that Fusion Advisors is not an affiliate of NFP, or in my words, a shill to attract unwary advisors ripe for, shall we say, aggressive acquisition.

In fact, none of Fusion's advisors is owned by NFP. Fusion's deal is with NFP Securities, the B/D that services NFP advisors, and if you think about it, the relationship makes a lot of sense.

A B/D With a Difference

NFP Securities might be the only B/D in the independent world that isn't trying to attract registered reps; it merely services NFP advisors as they are acquired. So when Silverman came along with a plan to attract a sizable chunk of securities business that would require no recruiting and little support, NFP Securities signed on the dotted line. The only catch was an exclusive contract, which meant that all reps who joined the Fusion Network would have to run their business through NFP.

However, that was also a positive, in that the more securities business Fusion's advisors bring to the table, the stronger Fusion's negotiating position. I have to admit that the deal as described by Palaveev is pretty sweet. In general, by combining its advisors' AUM and other securities and insurance business, Fusion can get NFP's highest payout (about 96%), offer advisors a higher payout than they probably did from their old B/D (the top payout is about 91%), and make pretty attractive revenues on the spread.

So far, Fusion Advisor Network has attracted some 200 advisors (all registered reps), with $2.5 billion in AUM and another $4.5 billion in assets invested other ways. This represents about $50 million in securities revenues to NFP Securities that they wouldn't otherwise have.

In return for virtually no cost to its reps (due to the higher payout), Fusion works to make its advisors' firms better along four fronts--business management (planning, consulting, and marketing), technology (selection of systems, integration into the practice, training), compliance, the exchange of ideas (conferences, workshops, and a robust online network) and group buying.

While these services (except maybe the buying power) are offered by every B/D and custodian to one degree or another, Fusion claims that by focusing solely on their delivery and hiring bona fide experts in each area, they can deliver a quality of service that you can't get anywhere else. The addition of Palaveev is a pretty powerful indicator of their commitment to making it real.

Palaveev's Portfolio

For his part, Palaveev's first project was to survey the Network to get a better picture of the practices' needs, and create benchmarks for Network practices (as the partner in charge of Moss Adams' annual advisor surveys, he is probably the top data guru in the advisory industry), to increase and broaden technology leverage, create a program to facilitate (and possibly finance) practice transitions, and to negotiate with custodians so that Fusion can offer its services to RIAs, too. "Ideally, we'd like to have an equal mix of registered reps and RIAs in the network," he says.

While it's a logical step, creating a program for RIAs may prove to be something of a challenge. With no "payout" to manipulate into a win/win/win, the deal between custodians, advisors, and Fusion probably will have to be more straightforward: Fusion simply taking a portion of the fees off the top.

There are trading charges and other costs which custodians typically pass along to advisors and their clients that might possibly be reduced commensurate with higher asset volume, but it's less likely that RIAs will actually make more money simply by joining the network than it is for most RRs. "With RIAs, we'll charge roughly 5% of their fees, which is a bargain for the services they'll get," says Palaveev. Maybe so. Call me crazy, but I suspect it will be somewhat harder to sell services for a fee than ones that pay for themselves. But if anyone can make it work, it's Palaveev.

For anyone who's listened to what independent advisors say about the services they get from their B/Ds or custodians, it's easy to see why Palaveev believes there's a need there to be filled, especially if it can be done at virtually no additional cost to the advisors. What's more, Fusion's economic incentives are well aligned with its advisors: they make money by attracting more advisors, and by building the business of those advisors. The more difficult--and far-reaching--question is why this need exists in the first place.

Over the years, I've had sort of a love/disappointment view of the B/Ds and custodians who serve independent advisors: on one hand, they have greatly contributed to the growth of the industry. On the other, they rarely seem to offer the right services to their advisors, or execute well on the services they do offer. As far as I can tell, the problem is two-fold: These firms are often run by folks with a wirehouse background (or bankers, for heavens sake) who don't really get the whole independent, client-oriented movement; and of course, B/Ds are very narrow-margin businesses--keeping costs down is how they keep the doors open.

In that light, the need for--and future prospects of--firms like Fusion are pretty rosy. As securities trading and clearing becomes even more of a commodity, with shrinking margins, securities firms have fewer resources to provide the services that advisors need. It's a Catch-22. They need to find a better economic model, one that enables them to invest in the expertise that can truly help independents. Pershing's hiring of Mark Tibergien is one such investment, made possible by the tremendous financial might of Pershing LLC.

But by losing someone of Palaveev's talent to Fusion, the B/Ds and custodians who serve independent advisors signal that they aren't yet ready or able to do what it takes to provide advisors what they need to compete in today's high-tech, ultra-competitive securities industry. The future of independent advisor support will increasingly belong to the big firms with huge resources--and to entrepreneurs like Silverman, and now Palaveev, who create a better economic model. All in all, maybe that's not such a bad thing.


Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at rclark7000@aol.com.

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