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After the Flood

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Mindy Diamond started her career as an accountant. By chance, she was interviewed by the head of the firm who, after hearing Mindy describe what was wrong with her current job, told her she wasn’t cut out to be an accountant, but would make a great recruiter, and offered her a job with the recruiting firm.

Within a year, she was the top recruiter in a firm of over 100 recruiters. In seven years, she was an officer in the company and director of training. By then, her husband Howard had a successful law practice; they wanted kids, so Mindy left her job to be a stay-at-home mom.

Fast forward to 1997; Mindy and Howard are having dinner with friends, one of whom is a branch manager at Morgan Stanley, who’s lamenting the pressure he’s under to hire new brokers and the lack of good recruiters to help him do it. Even though she doesn’t know anything about retail financial services, Mindy thinks perhaps she could be of assistance.

Working off her bedroom floor, she takes a shot at finding some new brokers for her friend. Within three months, she’s getting calls from Morgan Stanley branch managers all over the country asking for recruiting help. Two years later, she moves her office to the basement, and hires two more recruiters.  

Today, Mindy and Howard Diamond (who burned out on corporate law after 20 years, and now serves as her COO) and 15 employees work out of a beautiful old mansion in Chester, N.J. Together, they run one of the top search and consulting businesses in financial services, and the only firm that is equally expert in working with wirehouse brokers, independent advisors and RIAs.

That gives Mindy a unique perspective from which to talk about the unprecedented wave of brokers currently “breaking away” from Wall Street these days, as well as the opportunities, challenges and pitfalls for existing independent advisory firms to grow by absorbing them. Surprisingly, the biggest obstacle to independent firms capitalizing on this once-in-a-generation migration is not the difference in cultures—it’s a striking lack of business acumen in the independent world.

According to a May 2009 TowerGroup study, from 2002 to 2009, wirehouses and bank BDs each lost 20% of their brokerage force, while regional BDs lost 31%, and insurance BDs saw their ranks decline 40.6%. Where did those “breakaway brokers” go? For sure, some left the industry altogether (the total number of all financial advisors declined 9.5% during this period), but the vast majority went independent: Independent BDs increased their advisors by some 21.4%, while independent RIAs grew from 25,000 to 41,500—an increase of 66%.

What’s more, this broker diaspora is far from over. In its August 2008 survey of financial advisors, the Aite Group found that over one out of three (35%) of the 10,000+ brokers at major wirehouses were considering independence. Sixty-two percent of those have an average client size of over $200,000, with 21% averaging more than $1 million in client assets. No longer can breakaway brokers be written off as failed producers.

Unlike the commission brokers of years past, along with today’s breakaway brokers come client AUM: According to Aite, just under half of today’s breakaways earn between 25% and 50% of their revenues from fees, while another 33% get more than 50% from fees. Their reason for leaving? More independence: 67% of breakaway brokers cited “more freedom to make business and advice decisions” as the primary reason for leaving their current firms.

All this spells opportunity for advisors affiliated with independent BDs, and for independent RIAs. According to Cerulli Associates, in 2008, the major wirehouses accounted for about $4 trillion in retail advisor managed assets, which means we’re probably looking at close to $1 trillion dollars in the process of migrating into the independent side of the street. Estimates of the current size of the independent advisor channel seem to vary widely, but a best guess looks to be somewhere between $1.5 trillion and $2 trillion.

Some of the more entrepreneurial of those breakaways will start their own firms. But, as Mindy Diamond points out, if they were entrepreneurs, they probably wouldn’t have gone to work for wirehouses in the first place. That means the majority of those brokers—and the trillions of client dollars they represent—are or will be looking to affiliate with an existing independent firm. Without question, these acquisitions/mergers will have a major impact on the revenues and equity value of the independent firms that can make them work.

Mindy says that most deals attempted between RIA firms and breakaway brokers don’t work out. While there are usually problems on both sides, the most usual cause falls not on the culture of the brokers, but on RIAs. “Not 5% of independent RIA firms will successfully recruit a broker,” she told me. “And the success of RIAs buying other RIAs is only slightly higher than that.”

The problem seems to be that even in large RIA firms, advisors often aren’t particularly good business people. We all know independent advisors tend not to have a viable (or any) business plan for growing, or much capital to invest in growth. According to Mindy, they also typically don’t know the value of their own firms, which makes it hard for them to value another firm or revenue stream, and almost impossible to project the resulting value of a merger. “They usually aren’t who they think they are,” she told me. “And they usually aren’t willing to put their money where their mouths are, or part with equity.” RIA firms that do have acquisition experience, she pointed out, have a much higher success rate.

In fact, Mindy says that the process of trying to merge a broker with an RIA is so revealing that both sides benefit greatly, even when the deal doesn’t go through. She recently had an engagement where an RIA firm with $600 million AUM was attempting to acquire a wirehouse brokerage team with a $500 million book of business that generated around $2 million a year in revenues largely from fees.

The broker was being extremely reasonable; all he wanted was a fair amount of equity in return for the value he was adding, and to participate in the growth of the firm. But the RIA partners couldn’t bring themselves to part with the equity they had taken years to build up. They offered the broker 10% of the firm. The deal died—despite the fact that the broker’s biz could have nearly doubled the value of the firm and cut their overhead margin in half, with both on the contingency that he only got paid if he delivered.  

But the experience was far from a total loss. For one thing, Diamond didn’t let them waste a lot of time. “I’ve learned over the years to have a discussion between both parties about the expectations of the deal terms right up front,” she said. “Like most folks, these guys really liked each other, and probably would have met 20 times before they realized they weren’t in the same ball park.”

For his part, the broker realized he needed a stronger value proposition and a more concrete understanding of the value he was bringing to the table. The RIA firm was forced to think through why they wanted to make an acquisition, what terms they were looking for, and who they wanted to acquire.

Using a potential merger as a practice management training tool is about as novel an idea as I’ve heard in this industry. I guess that’s why Mindy Diamond is one of the best in the business. As it has with her business, the migration of breakaway brokers is destined to change the independent advisory business. How good that change will be—and for whom—will depend on whether independent firms can cowboy up, and position themselves to bring in brokers on terms that are good for both parties.


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