InvestmentNews – Top advisers break away for chance to own equity
Newer independent firms give advisers a chance to take on more risk as partners
By Mason Braswell
With the financial crisis fading further into the background, advisers are once again looking for the ability to own equity in their firms, this time at independents.
Equity-based compensation has taken off in the six years since the crisis, with new players emerging, including investment adviser roll-up firms and consolidators who lure top talent with the promise of an ownership stake. Some of the largest adviser moves in the third quarter were teams who left wirehouses to join businesses that offered company shares for those willing to take the risk of getting in early, according to moves tracked by InvestmentNews’ Advisers on the Move database.
Among the third-quarter highlights:
- HighTower Advisors, a firm founded in 2008 that has not been shy about possibly going public, drew in two ex-Bank of America Merrill Lynch teams with a combined $1.2 billion.
- Lebenthal Wealth Advisers, the wealth unit launched last year by a storied Wall Street firm, brought on a $600 million team from BNY Mellon.
- Snowden Lane Partners, a firm founded in 2011 by former Merrill Lynch executives, added a $400 million wirehouse team.
“Advisers are used to eating what they kill,” said Ron Edde, recruiter with Millennium Career Advisors. “When you go to some of these firms, you’re not just eating what you kill, you’re eating what everyone else kills, too.”
The growth in firms offering equity is in part a product of industry consolidation. Last year, nearly a third of firms with more than $1 billion in assets added equity owners, versus only 8% of firms under $250 million in assets, according to a survey of 900 registered investment advisers by Schwab Advisor Services.
While equity is only one portion of the overall reason advisers move to partnership-style investment advisers or hybrid firms, it speaks to the culture that breakaways are looking for, according to Danny Sarch, president of his own recruiting firm, Leitner-Sarch Consultants.
“I don’t downplay the stock in these places that I work with as hopefully being worth something more, but it’s more about what they’re doing and what it represents in terms of having a seat at the table,” Mr. Sarch said.
The equity being offered in the independent space is different from what wirehouse advisers may have received from their old firms, according to Tony Sirianni, a founding partner at Steward Partners who now runs a public relations consulting firm, Sirianni Strategy Group. Primarily, they do not have to worry about losses in divisions outside of wealth management bringing down the value of their stock.
“The pitch on the stock is that [shareholders] have control over what goes on in the company,” Mr. Sirianni said.
Most advisers get a share of firm equity as part of a transition package, which can total about 150% of an adviser’s annual revenue. The equity portion may account for around one-third of the value of the overall package, according to Alois Pirker, an industry consultant and research director at Aite Group.
For an adviser with $1 million in production, that third could triple or quadruple in value over five to 10 years, depending on how quickly the firm grows, according to Michael Maurer, a former Smith Barney manager. Last year, he founded Steward Partners, an independent firm that aims to have 30 to 40 advisers sharing equity.
Mr. Maurer provided the growth possibilities as a general example, but he said that advisers and other employees at Steward will have a combined 40% equity and that the ownership is generally based on production levels.
The equity compensation plan at Steward “was designed after speaking to about 100 advisers over the course of a year,” he said. “I asked, ‘What are the most important things to you?’ and they told me it was equity and a slightly higher payout.”
Getting an equity stake has become even more enticing as independent firms grow larger and become ripe for liquidity events such as initial public offering or mergers and acquisitions. Many wealth management firms that have gone public have fared well, including LPL Financial Services and Raymond James Financial Inc., which now trades at about $52 (adjusted for stock splits) after starting at $0.74 a share in 1983. LPL’s stock is up around 45% since the company went public in late 2010.
HighTower, Focus Financial, Lebenthal Wealth Advisors and Cantor Fitzgerald, which launched its wealth unit last year and is offering a form of equity, are all contenders for an IPO, according to Mr. Pirker. Executives at those firms have been open with recruits about that possibility.
Despite the passage of time, the risks remain fresh in the minds of many wirehouse advisers who saw their riches vanish when Citigroup Inc. and Merrill Lynch & Co. Inc. shares plummeted in 2008, wiping out much of their deferred compensation tied to company stock.
“These guys got burned,” Mr. Sirianni said. “I [and other managers] lost millions in Citigroup stock.”
Mr. Edde noted that, in addition to the risk that a firm fails, advisers could see the value of their equity dwindle if the business adds debt faster than revenue. Some firms have become more selective after doling out equity too quickly to lower producers, he said.
“The risk is that you over dilute yourself and wind up basically not being worth nearly as much,” he said.
Mr. Sirianni warns advisers to be aware of what share class they have: Some firms structure ownership differently, and certain shares may not be worth as much as others. Advisers should also ask who else has ownership. For example, a private equity firm could make major decisions or replace top management, he said.
Advisers should also know ahead of time how they can sell or offload their shares if they leave before a liquidity event, according to Mr. Sirianni. Without a buyout option, they may risk losing the value of their equity.
Mr. Maurer has reservations about going public, despite the best IPO market in years.
“An IPO is great if you’re going to retire,” he said, adding that he isn’t planning one for Steward. “But if you’re going to stay at an institution, they’ll have rules and regulations that didn’t apply before, and there are so many things that are downsides to going public.”
Mr. Pirker said the other factor in the popularity of equity ownership is the economy, which could inspire some firms to act on their promises soon.
“There’s always some folks speculating that the market could tank as well, so there’s a window open right now,” he said. “I wouldn’t be surprised if someone makes a push for that window and tries to leverage the positive markets we have right now.”