You may have read the report this week that HighTower Advisors landed another top brokerage team, this time from Merrill Lynch. These breakaway brokers worked together in Merrill’s private banking division, and could potentially add some $5 billion to HighTower’s growing asset base, which stood at just over $20 billion before this most recent addition.
Admittedly, that’s a drop in the bucket compared to Schwab Institutional’s $679 billion in client AUM or even Pershing Advisor Solutions’ $125 billion. Still, HighTower’s growth curve is pretty impressive in three short years, particularly its ability to attract the very largest advisory firms that are every custodian’s dream market, like these Merrill brokers. To my mind, HighTower’s rapid—and escalating—success suggests that its hybrid model (or as HT execs describe it; their Open Source Architecture) is indeed a look at the future of financial advice.
In the interest of full disclosure, I should mention that I did some publishing consulting work with HighTower last year, although I’m not working on any projects with them at present. Working with corporate clients poses some obvious conflicts for a journalist, but it also offers some advantages as my relationship with HighTower and its CEO Elliot Weissbluth illustrates.
For many years now, I’d believed—and written—that the conflicts inherent in commission-compensated financial advice and principal trading far outweighed any potential client benefit, both with respect to advisors themselves and to their broker-dealers. Consequently, I was firmly in the camp of folks who looked to the independent RIA custodians as the best strategic partners for professional advisors. But in my time working with HighTower and Elliot, I came to see the advantages of taking a broader view, and the drawbacks in providing limited services to advisors and their clients.
The advantage of the open architecture approach is that it takes independent advice to a new level of independence, while at the same time offering a potentially unlimited array of financial products and solutions to its affiliated advisors and their clients. That’s because an open architecture firm isn’t really a custodian, in the traditional sense. And even though HighTower is registered as a broker-dealer, is isn’t really a traditional BD, either. In fact, there really isn’t even a name for what a firm like HighTower is, which is probably the ultimate confirmation that it is truly breaking new ground.
The concept behind “open architecture” is to band independent advisors together to create even greater independence through diversification of business affiliations. That’s a mouthful to be sure, but in practice, it’s very simple. Rather than having to choose which custodian an advisor works with, HighTower works with all four of the largest RIA custodians, so its advisors can have client accounts with whichever custodian makes the most sense for each particular client. It also doesn’t limit its clearing operations to one clearing firm: not only does this increase the number of products and services its advisors can use, it creates some competition among clearing firms to provide the best execution. And HighTower also works directly with brokerage firms, to gain access to sophisticated products and strategies that aren’t available to the vast majority of independent advisors. (For more on HighTower, see Investment Advisor's August 2009 cover story on the firm.)
The bottom line is that an open architecture firm such as HighTower solves one of the major dilemmas that has plagued the independent advisory world since its emergence almost half a century ago: giving up access to sophisticated financial products in order to get independence from brokerage firm sales pressure. HighTower has created a business model that increases both sophistication (through access to the broadest possible array of products) and independence, by working with multiple product and service providers. And to ensure that the firm doesn’t start to take on a brokerage mentality, HighTower advisors also have an ownership stake.
Even for an old skeptic like me, it’s hard to argue that the open architecture model isn’t a better way to offer financial advice—today, and for well into the future.