Game Changer /

Billion Dollar Babies

Bigger & Better

By almost every measure, advisers with assets of more than $1 billion are outperforming their peers

By Mason Braswell and Trevor Hunnicutt — March 16, 2015

Scott Hanson has achieved a level of success and fame uncommon among financial advisers. He has a following of potential clients on radio and a following of advisers who seek his advice.

Mr. Hanson is also his own biggest critic.

Click here to find out how six RIAs became billion dollar babies.

“There's something that keeps driving me — pushing me forward,” said Mr. Hanson. “Quite frankly, I don't feel like a successful adviser. I look at other advisers with bigger practices and think, 'What have I done?' ”

For all his humility, the founding principal of Sacramento, Calif.-based Hanson McClain Group is part of a growing clique in the wealth management business.

It's no secret that the independent adviser has risen from being a cottage industry on the margins of professional finance to reframing a debate about how financial advice should be provided.

Along the way, many have achieved a goal they never thought possible: the billion-dollar club.

Growing Giants

Source: InvestmentNews/Moss Adams Practice Management Benchmarking Studies

Twenty percent of registered investment advisers participating in InvestmentNews' annual benchmarking study of financial advisory firms managed $1 billion or more in assets last year. That number was 2.5% a decade ago.

“Just 10 years ago, people thought it was a big deal to get to $100 million in assets,” said Mark Tibergien, chief executive of Pershing Advisor Solutions. “[But] the rate of growth has been exponential. They crossed the mountains and swam the streams. They had no idea what was on the other side. Now there's more clarity about what success looks like in this business.”

Though these billion-dollar babies are a diverse group, on the whole they appear to be growing their businesses faster, trimming overhead more aggressively, serving larger clients and generating more money for their owners than their smaller brethren.

They have increased revenue by 23% annually since the financial crisis, compared with 15% for all other firms in the study. Their clients have $2.74 million invested with them on average — nearly three times the average for smaller firms. Their overhead accounts for 33% of revenue, compared with 39% for other firms. And their owners earn $841,580 a year, while owners at other firms earn $414,816, according to the study.

Billion dollar attributes

Source: 2014 InvestmentNews Financial Performance Study

Critical Mass

Getting to $1 billion has a number of perks. Advisers can get better pricing from vendors, technology companies and other providers. That was the motivation that drove Robert Mayes, who expanded his BlueCreek Investment Partners to $500 million organically over a decade before merging in January with a $900 million firm, Keel Point.

“You have to be large enough that you're able to control those conversations and to more influence in terms of providing services that are economically viable,” Mr. Mayes said. “You have to have critical mass.”

The $1 billion number often helps RIAs qualify for practice management consulting services and premium pricing from custodians. It may give them access to their custodian's senior executives, according to John Furey, who owns Advisor Growth Strategies, a consulting firm.

“Size does matter when you think about firms that are supporting you,” said Mr. Furey. “The simple analogy is that there are value volume discounts, and most custodians do have custom pricing schedules.”

Yet for those firms, a billion dollars isn't a magic pill. As they've grown, key questions have emerged about how to build lasting enterprises and maintain the momentum they need to continue driving growth.

“It's important, but does it mean that you have accomplished a lasting business? I don't think so,” said Joe Duran, chief executive of United Capital, based in Newport Beach, Calif. “The idea is that it's not a finish line, and if it is, you're not thinking about it the right way.”

As firms get bigger, they often need to strike deals to lower fees for their biggest clients. The amount they spend on professional compensation is nearly 2 percentage points higher than the 37.8% smaller firms pay. And the revenue of the latter is smaller than it was for billion-dollar firms a decade ago — it averaged $9.7 million last year, down from $12 million the decade before, according to the InvestmentNews study.

$5 Billion Threshold

Executives at billion-dollar firms need to be looking ahead to the next threshold, $5 billion, according to Mr. Duran, or they risk languishing at $1.5 billion or even losing their gains.

“If you're at a billion, the goal should be how to get to $5 billion in assets and $25 million in revenue,” he said. “It's no different from the person who is sitting there today at $100 million to $200 million and thinking, 'How do I get to $1 billion?' ”

I honestly thought I was king of the universe.— Joe Duran,  CEO of United Capital

Mr. Duran, 47, whose firm has about $13 billion in assets under management, knows from experience the dangers of not planning. He first crossed the $1 billion line at a previous firm in 1998, when he was 31.

“I honestly thought I was king of the universe,” he said. “We had a massive party at the Beverly Hilton Hotel, and then over the next year we lost $600 million in assets.”

Had it been 2008 the firm would have failed, he said. He and his partners realized it couldn't survive when asset levels fell, partly because of large employee salaries. They couldn't support those costs.

Many billion-dollar firms have made two or three trips to the mountaintop. They grew to $1 billion before the financial crisis, then watched their businesses struggle and incomes flat line. The bull market helped them find their way back. Others reached the milestone after their first merger or acquisition.

For BlueCreek and Keel Point, which are keeping separate brands, the goal is to grow to $5 billion in the next five years. Mr. Mayes said the firm needs to grow to keep up with the giants vying for the same clients. He aims to add at least one veteran practice every year.

Mr. Duran advises that executives at $1 billion firms will have to completely shift their thought process to get to $5 billion. That means coming up with scalable processes, such as account opening and generating referrals. It also means reorganizing the team and focusing personnel away from travel and meetings, for example, and on business development.

“The people who got you to $1 billion are doers, but the people who get you to $5 billion are thinkers,” he said. “The shift from doing to thinking is a shift that most advisers are very uncomfortable with because they have always equated their value with their action, not with their thought.”

Perhaps most importantly, it means leaving behind your ego, Mr. Duran added, recalling his own humiliation in 1999. That translates into better delegation of responsibilities and replacing high executive salaries with variable compensation.

“They think if they get a nicer car, if their office is bigger, if they have their own workout facility in the office or their own showers, that somehow they're more worthy,” Mr. Duran said. “I would be talking about what can go wrong and how you can protect yourself against it.”

Challenges Ahead

Serving the wealthy is a difficult task that is not getting any easier.

Mark P. Hurley, a prominent investor in advisory firms and the CEO of the Fiduciary Network, said the most successful firms will be highly specialized.

Every wealth manager's biological imperative is to add clients.— Mark P. Hurley,  CEO of the Fiduciary Network

Among those he's invested in is an RIA with a niche serving the estranged spouses of tech firm executives. He said the firm developed expertise in the legal issues surrounding divorces, tax planning and the compensation practices of tech firms.

That not only helps them identify issues their clients didn't know they had but makes getting clients through referrals easier and less expensive, he said.

“Every wealth manager's biological imperative is to add clients,” Mr. Hurley said. “You've got many more guys out there trying to get more clients, and they've become very sophisticated about it.”

Not all advisers are up to that challenge, and only a handful will join the club, according to Mr. Hurley.

“They liked when their marketing strategy was looking at their phone and waiting for it to ring, with their business throwing off a lot of cash flow,” he said. “Most of them will fly into the ground. ” ■

Six RIAs That Made It To The Top

exencial John Burns

Technology, teamwork jump-start growth

Exencial Wealth Advisors

Oklahoma City, Okla.

AUM: $1.4B
Clients: 700
Employees: 22
Advisers: 10
Year firm founded: 2002
Year firm became a billion dollar baby: 2013

John Burns, a 21-year industry veteran, started out the way a lot of advisers do: working in the insurance business for a large brokerage — in his case, John Hancock Distributors Inc.

When he founded Burns Advisory Group 10 years into his career, Mr. Burns had no clients and no assets under management. He just hoped to use the knowledge he had gained from the insurance business to help clients with financial planning.

“I never thought I'd have $50 million, much less $100 million,” he said. “Some place along the way, it dawned on us, 'We have a real business here. This isn't just a financial planning practice.' ”

As the firm approached $200 million in assets under management, Mr. Burns said, he began believing in it enough to make some serious bets on new technology.

For example, the business was still doing much of its portfolio management and reporting by hand. It would take an hour to prepare for a client meeting and understand grasp the portfolio positioning, so Mr. Burns invested $70,000 (a lot of money at the time) into a new portfolio management and performance reporting tool and had everyone working overtime to integrate everything.

“That's probably the first big one, where I got out over my skis a bit,” he acknowledged. “But I believed in it, and the clients were going to have a better experience. You have to get out of your comfort zone.”

The next move was to start looking for a partner. Through a recruiting firm, he found Jerry Georgopoulos, an adviser based in Dallas. His firm, Executive Financial Group Corp., was similar to Mr. Burns,' with assets of about $225 million.

“It was getting clear we needed each other to hit our goals,” Mr. Burns said.

They combined in September 2011, split ownership 50-50 and rebranded as Exencial Wealth Advisors. They have grown organically to about $1.3 billion, partly because they operate in multiple locations. They also have an office in Old Lyme, Conn., run by a former adviser at Ameriprise Financial Services Inc.

— Mason Braswell

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klingman Gerry Klingman

Getting bigger means delegating more

Klingman & Associates

New York City

AUM: $1.5B
Clients: 300
Employees: 15
Advisers: 5
Year firm founded: 2001
Year firm became a billion dollar baby: 2013

One would think that once your firm hit $1 billion in assets under management, you'd take a break. But for Gerry Klingman, the bar just keeps moving higher.

Mr. Klingman, who had been in the industry for 25 years by the time Klingman & Associates hit the milestone two years ago, realized he didn't want it to stop there. Why not $3 billion to $5 billion in the next five to 10 years, he thought?

To start, he needed some outside help. Mr. Klingman had a large business that was still managed like a small one. A consultant had described it as “the largest lifestyle practice in the country,” referring to the boss' heavy involvement in all aspects of the operation.

“You can no longer be the typical entrepreneur adviser who's advising a client, handling investments, but also doing technology and compliance,” Mr. Klingman said.

After being approached several times by Focus Financial Partners with offers to buy a stake in his firm, Mr. Klingman turned the tables: Last year, he asked Michael Paley, a former managing director at Focus Financial, to be chief operating officer.

Mr. Paley accepted, looking to take a more involved role in one business rather than advising 20 firms, as he had done at Focus.

“The kernel that we have here is extraordinary,” Mr. Paley said. “And it's about leveraging that and thinking through how we use technology more efficiently.”

His job is to create work flows, repeatable client processes and other systems to make possible larger-scale operations. As it looks toward the $5 billion mark, the firm also may begin making outside hires or tapping into Mr. Klingman's roster of contacts of wirehouse advisers.

“You have to remove your ego from the place,” Mr. Klingman said. “I'm going to die some day or retire or become disabled, and this is a place that's going to exist after that.”

— Mason Braswell

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klingman Scott Hanson

High profile key to firm's growth

Hanson McClain Investment Advisors

Sacramento, Calif.

AUM: $1.8B
Clients: 3,900
Employees: 70
Advisers: 17
Year firm founded: 1993
Year firm became a billion dollar baby: 2006

If there were just one way to build a successful practice, Scott Hanson likely wouldn't be in the financial advice business.

The maverick financial adviser eschews traditional methods of marketing. You won't find him networking at the country club. And he's not a fan of growing a business through mergers.

So how did he become a billion-dollar baby?

“The cool thing about this industry is there's so many ways someone [can] go,” said Mr. Hanson.

In his case, he made himself a fixture in the Sacramento, Calif., community where he is based. He advertises online. He and business partner Pat McClain broadcast their own radio show. He's co-written books for advisers and average investors. He's a regular speaker at conferences and seminars, and he's frequently quoted by journalists.

Those factors helped Hanson McClain Investment Advisors pass $1 billion in assets under management — a title it first earned before the 2008 stock market rout and now hope to retain permanently.

“For advisers that are good at marketing, [financial advice] provides a real sustainable business,” said Mr. Hanson. “I spend more time on marketing and business growth than I do with clients.”

Using marketing — rather than relying on referrals or cold-calling, the old fallbacks for advisers — has been key to forming lasting relationships with clients. He's happy to invest 18 months of the revenue he expects to earn from a new client to win the client's business in the first place.

“The interesting thing about financial services is [that] a consumer can't go out and test drive us,” said Mr. Hanson. “It's quite a challenge for someone to say, 'I'm going to trust this firm or this individual with my life savings,' so it's important for advisers to create the perception that this is a firm to work with — this is a trustworthy firm and a competent adviser.”

— Trevor Hunnicutt

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highline Neil Simon and Bill Schwartz

A business, not just a practice

Highline Wealth Management

Bethesda, Md.

AUM: $1.3B
Clients: 200
Employees: 26
Advisers: 6
Year firm founded: 2002
Year firm became a billion dollar baby: 2010

A common refrain of founders of $1 billion firms is that they often must give up one of the attractions of the business: working with clients.

For Neal Simon, the move felt natural. By the time he founded Highline Wealth Management in 2002, he already was running three other businesses. Then 34, he was the chief operating officer at an insurance firm, COO at a management consulting firm, and chairman and founder of USLaw Network Inc., a website and membership organization for lawyers that he helped establish during the Internet boom in the late 1990s.

“I'm wired in a way where I jump out of bed with more energy if I'm trying to grow the business instead of just trying to stay at steady,” Mr. Simon said.

He started the firm from scratch. At the end of the first year, he had $70 million in assets, but only 10 clients — and that included family and friends.

Over time, Highline Wealth grew organically, via referrals among wealthy clients in the region. Just short of a decade after starting the business, Mr. Simon reached the $1 billion mark.

He invested in the firm by bringing on advisers who could handle the growing client base. That allowed him to step back and focus on the business plan and big-picture growth strategy.

“I've always tried to build a business that could provide great services without great involvement from me necessarily and that would become an institution with recurring revenues and cash flows, regardless of whether I showed up,” Mr. Simon said. “I've always tried to build a business as opposed to an advisory practice, and I think some people in our industry don't understand the difference.”

As they aim for $5 billion, he and the co-owner Bill Schwartz, who joined in 2006 from Merrill Lynch & Co., are looking for veteran advisers whose firms would make good acquisitions.

— Mason Braswell

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Abacus J.D. Bruce

Smaller accounts prove to be big asset

Abacus Wealth Partners

Santa Monica, Calif.

AUM: $1.3B
Clients: 1,025
Employees: 41
Advisers: 28
Year firm founded: 1987
Year firm became a billion dollar baby: 2014

It's said you can't build a large financial advisory practice without focusing your efforts on the über-wealthy. Advisers with clients who are merely “mass affluent” are often told that they should trade up as soon as they can, firing or meeting less regularly with the plebeians.

Abacus Wealth Partners has become a $1 billion-plus firm without making those tradeoffs. For more than a decade it has worked to develop a small-accounts division, as well as retainer-based and one-time planning alongside more rarefied services — such as estate planning — for the “one percenters.” Eighty percent of its 1,025 clients keep less than $1 million with the firm. The wealth adviser eliminated asset minimums last year.

In 2009, Abacus found that smaller clients were easier to retain — a pleasant surprise during a financial crisis. And ancillary services generate fees, along with a consistent stream of referrals that turn into enduring client relationships.

“It will really help us cross the $2 billion mark,” said J.D. Bruce, Abacus' president.

Mr. Bruce sees the $1 billion threshold, which the firm crossed last spring, as symbolic. Nothing beats profit as the most important business metric, he said, adding that he has learned that having healthy profit margins is essential for a business subject to the twists and turns of the stock market.

“We're a business that relies on an outside force controlling our revenue, as the market goes up and down; we have zero control,” Mr. Bruce said.

At the same time, revenue and earnings can vary widely among firms with the same assets under management: Wealthier clients benefit from larger discounts, for instance, so they tend to pay a smaller percentage in fees. And employees, compensated in part on revenue growth, can't get the raises they seek if client assets fail to translate into revenue.

“All my young people would leave if we're not growing,” Mr. Bruce said. “I'll train them, and then they'll leave.”

But he concedes being in the billion-dollar club does carry some appeal.

“There's a cool factor to it and a cachet that's helpful,” he said. “There's something nice about that.”

— Trevor Hunnicutt

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Altfest Karen C. Altfest

Fee-only pioneer blazes a new trail

Altfest Personal Wealth Management

New York City

AUM: $1.2B
Clients: 560
Employees: 28
Advisers: 15
Year firm founded: 1983
Year firm became a billion dollar baby: 2013

Some of the early pioneers of the fee-only, independent financial advice movement have started to join the billion-dollar club for the first time.

A prime example is Altfest Personal Wealth Management.

When Lewis J. Altfest founded the firm in 1983, fee-only financial advisers were few and far between.

“We weren't following anyone else's road map,” said his wife, Karen C. Altfest, now a principal adviser at the firm. “Figuring out how you get from there to here [has been] fun.”

It's been about two years since the firm crossed the $1 billion mark. And even though the firm has been in business for 32 years, Mrs. Altfest said, “it came sooner than we thought. We knew we were taking in a lot more clients.” All of a sudden she woke up and saw a number she wouldn't forget — $1 billion.

Revenue growth has been the key to upgrading their firm for both clients and employees. Today, for example, Altfest can afford to send an adviser to a conference on fund management or college-saving plans. The firm also has a planner on staff with expertise in employee stock options.

And it's hired younger staff to help lighten the load of experienced employees. “If we want our leaders to take on more tasks,” she said, “you have to help them free up other time.”

Across almost every aspect of client interaction, Ms. Altfest says growth has helped improve services. She said the firm is able to better deliver specialized guidance on charitable giving and Social Security — factors that enhance the experience of clients. The

firm's client roster includes many single women, including widows, a niche she has developed.

Ms. Altfest believes there's always more the firm could be doing. Some clients may want more service — at night, at a branch closer to home, maybe in a different city.

“You don't want to be stagnant, and personally I don't feel like there's an in-between,” she said. “If you're not gaining, you're losing.”

— Trevor Hunnicutt

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