An extraordinarily fast-growing financial services company is trying a new approach to encourage further expansion: It's reaching out to independents in hopes of convincing top advisors that they can have wirehouse efficiency with an independent's freedom of choice.
Chicago-based HighTower Advisors was ranked No. 13 on this year's Inc. list of the nation's 500 fastest-growing private companies. The firm, founded in 2008, had $43.9 million of revenues in 2011, an 89-fold increase in three years.
A high growth rate from a startup's small base might be somewhat expected. That's especially true for HighTower: The company's business model is to offer partnership stakes to breakaway wirehouse brokers managing hundreds of millions or even billions of dollars in assets.
"We give them cash up front and equity in the firm," says HighTower's CEO, Elliot Weissbluth. According to Michael LaMena, the company's chief operating officer, HighTower's partnership now includes 36 teams, with more than 70 advisors.
HighTower's startup surge, moreover, has been propelled by strong tailwinds. "The industry is undergoing a major change, and firms like High- Tower are in the sweet spot," says Alois Pirker, research director at Aite Group. "The largest firms are merging, and that has triggered a great deal of desire for change among advisors. HighTower has attracted some of those people."
While some advisors break away from mega-firms to become independent business owners, others prefer to be part of a larger company.
"The RIA market is hugely fragmented," Pirker says, "so we'll see some consolidation among firms into larger entities. This consolidation is overdue; it's highly inefficient for small firms to be managing assets. HighTower is one of the firms driving consolidation."
Yet another reason behind the growth at HighTower is concern about business succession, Pirker asserts. "With the aging of advisors," he says, "many see handing over ownership as their next step. HighTower offers them the opportunity to realize the equity they've built up in their practice."
By capitalizing on these trends, Pirker says, the HighTower model has proven to be successful. "HighTower supports its partners with the kinds of best practices they might find at a larger firm, so they can operate efficiently," he says.
Adding successful advisors is one way HighTower has boosted revenue growth. Washington-based Pagnato-Karp Group joined last year from Merrill Lynch's private banking and investment division. "We left for our clients," says Paul Pagnato, now a HighTower managing director and partner. "We were looking for a better solution regarding the advice and service we can bring."
Why HighTower, when other firms also offer support to breakaway brokers? "It was a host of things," Pagnato says, but a particular attraction was working within a "conflict-free" environment. "There are no proprietary products here, no IPOs, no secondaries. There aren't any restrictions on where clients can go with their cash."
Along with a lack of conflicts come multiple choices. "We can use multiple clearing firms and multiple custodians," Pagnato says. "We have access to research from all the major firms. In addition to the investments you'd expect, we have the opportunity to participate in smaller boutique offerings such as private real estate and agricultural financing. These deals are relatively small, so they would never make it to a wirehouse platform, but clients love them."
While some of HighTower's success has come from adding advisor teams, some growth has been organic. When Pagnato-Karp came to HighTower in mid-2011, the group brought $1.2 billion of assets. A year later, assets had risen to $1.8 billion, Pagnato says. Although he had worried he might lose some business because clients preferred to deal with a brand-name wirehouse, he found the opposite was true.
"I didn't realize it, but some existing clients were holding back," Pagnato says. "They're more comfortable with our current situation, so we're managing more of their assets." Indeed, Pagnato has found that leaving a wirehouse actually attracted new business.
"Soon after coming to HighTower, I had lunch with an investment banker we had been courting for years," he says. "He told me that he had never sent business our way because of the products our firm had pushed. Now that we're independent, he has sent clients to us. Other new clients have told us they like the fact that our firm doesn't have an agenda when it comes to their investments."
Indeed, the fear of leaving a household name seems to be dissipating. "There has been a fundamental shift in the landscape," LaMena says. "Talented advisors are looking for a better platform." HighTower has also chosen to pass on some teams, for a variety of reasons. "It might be geography, and it might be culture. If advisors have more of a broker-dealer-oriented structure," he says, "they may not fit well here."
All of HighTower's existing partners have a say in accepting newcomers. "There's no formal voting," he explains, "but we give a cross-section of our partners the opportunity to interact with teams we're considering. We want to be sure advisors will be collaborative."
Recently, HighTower expanded beyond the partnership format, rolling out two new options for advisors: the HighTower Network and the HighTower Alliance. "Both are designed for advisors who want to own their practice," Weissbluth says.
In the HighTower Network, advisors affiliate with HighTower's Form ADV filing, relying upon the firm for risk analysis and compliance oversight so that they won't have to hire their own staff in those areas. "Trading activity outside of our ADV will be prohibited," Weissbluth says. Network advisors generally will retain 80% of top-line revenues and turn over the balance to HighTower.
While HighTower Network advisors use the firm brand, that won't be the case with Alliance members. "They'll have their own ADV," Weissbluth says, "and be responsible for their own compliance." For HighTower Alliance members, the revenue split will be 90-10. Both Alliance and Network members will have access to HighTower services like research, capital markets opportunities and broker-dealer operations.
Mike Papedis, HighTower's executive vice president of business development, mentions a "continuum of independence" when describing the new ventures. HighTower can work with advisors who want to own their businesses as well as those who prefer entering into partnerships, he says.
Of course, as Aite's Pirker notes, "The High-Tower model is not for every advisor." Throughout the industry, there are many other RIA aggregators.
Omaha, Neb., wealth manager Ron Carson just started Carson Institutional Advisory to serve independent RIAs. Other firms, including Dynasty Financial Partners, Focus Financial Partners and United Capital Financial Advisers, are also eager to work with top advisors.
The bottom line, Pirker says, is that HighTower occupies a "good place" in a growing market. "The people there are really trying to build a firm with strength in the front and back office," he says. "They're focused on the operational side, realizing that's one reason a wirehouse can be more efficient than RIAs."