Recruiting a wirehouse advisor can be well worth the effort for growth-minded RIA firms -- but it's not easy, it takes time and you should expect a lot of false starts.
That's the message from Neal Simon, founder and chief executive of Highline Wealth Management, whose firm was the subject of a new case study for think tank and study group aRIA.
"Inorganic growth is an integral part of our strategy, and we realized we couldn't ignore the significant advisor talent in the wirehouse universe," says Simon.
In the past six years, the Rockville, Md.-based firm has doubled its assets under management to approximately $1.4 billion with five deals -- including the addition of two wirehouse advisors who brought a total of more than $200 million in assets.
Recruiting wirehouse advisors has "truly been transformational" for Highline, Simon says in the case study.
As top wirehouse advisors increasingly migrate to independent firms, Simon says growth-minded RIAs need to ask themselves if they are prepared to seriously pursue top talent and make the case that their firm is the right destination for those advisors.
Here's what the case study suggests RIAs should do:
1. MAKE THE COMMITMENT
"You have to decide if you're in or out," Simon says. "If you're in, you have to commit the time and resources to do it right. Too many people dip their toe in the water and end up wasting their time."
2. HAVE A PROCESS
Decide how you want to set up your internal resources and stick to it; Simon says he spends approximately 30% of his time on M&A activities. Highline also decided to hire a full-time director of corporate development -- whose job responsibility is to seek out, screen, meet with, recruit and integrate advisors -- but that function can also be outsourced.
3. SET CLEAR PRIORITIES
Decide what qualities are important to you, so you can more quickly and efficiently screen candidates, the case study recommends. Highline's priorities, for example, include geographic proximity to Washington, D.C., Baltimore, Philadelphia and New York; average client size of least $2 million; investment philosophy and culture.
"We kiss a lot of frogs," Simon says. "We're only interested in wealth managers, not stock pickers or salesmen. ... Based on an advisor's responses to basic questions we ask early on, we eliminate over 90% of acquisition candidates."
How does he know he's got a winner? "When I close a deal, I want to know I will be more excited to go to work the next day than I did the day before."
4. MAKE THE DEAL STRUCTURE WORK
Structure win-win relationships that factor in a variety of possible outcomes, the case study counsels. A new advisor may bring in double the projected assets -- or just half. Make sure your deal structure works for both parties.
Highline can offer wirehouse advisors cash up front, equity, a fixed salary or a revenue-sharing formula, according to Simon. "I can be flexible when it comes to trade-offs," he says. "I'm totally transparent. We open our books to new partners so they can see our economics, and work with them to make sure we understand their economics. Then we try to structure a deal that compensates both parties fairly across all possible outcomes."
When Highline was negotiating with a Merrill Lynch advisor to join the firm, Simon says running some hypotheticals made it "relatively simple to show him that the combination of a fixed salary, revenue sharing and profit distributions at Highline would at least equal, if not exceed, his current wirehouse payouts."
The Merrill advisor was interested in an equity stake as well, so he and Simon calculated the likely current and future value of his ownership in the firm. Those calculations turned out to be conservative, and the advisor's equity stake has almost doubled in value since he joined the firm, according to Simon.
5. PLAY YOUR BEST HAND
Compensation aside, offering wirehouse advisors control over their destiny is your ace in the hole, the case study contends. When a wirehouse advisor is considering a switch, powerful motivators include control of firm culture and vision, investment products and client service offerings, custodian selection, hiring and staffing, compliance policies and procedure, marketing and compensation.
RIAs must also be aware of the challenges involved with a wirehouse transition, Simon says. Most wirehouse advisors still have a sales-oriented, broker mentality, which can be difficult to surmount -- and transferring assets from a wirehouse is complicated and time consuming.
But for firms who want robust, inorganic growth, he says, the hassles are worth it. "Clients benefit from the depth and experience of the team," he says, while "employees benefit from the opportunity to learn from new people and shareholders benefit from increased assets and economies of scale."
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