Brooke’s Note: It often makes news when a big Merrill Lynch team breaks away to freedom. But the timing of this breakaway is particularly notable as has been its trajectory and the creativity that LLBH has brought to bear on behalf of its clients. A case in point: negotiating a credit default swap for a client on his former Fortune 100 company to protect his deferred-comp plan — a move that paid off in spades and is something the LLBH principals say they never could have swung at Mother Merrill.

When Jim Pratt-Heaney, Bill Loftus, Bill Lomas, Kevin Burns and team made their decision to break away from Merrill Lynch in late summer 2008 they had no idea that the Merrill they loved would soon essentially be lost with its sale to Bank of America Corp. See: This Merrill Lynch team leader broke away for fear of what might happen under Bank of America.

But on Oct. 17, 2008, a little more than a month after the deal was announced, they left to form LLBH Private Wealth Management, an RIA in Westport, Conn.

What they did know, however, was that for some time, the industry as they knew it was going in a direction that they did not want to be a part of. Were they prescient, lucky or just fed up? According to two of the firm’s partners, they knew that, for them, the old wirehouse model was broken and they were tired of having to explain and defend the actions of their firm. They admit to feeling “joy and rapture” as the entire team walked out the door on that fateful day. They have not looked back since. See: Merrill Lynch goes unmentioned as Bank of America settles on CEO choice.

Four years later, LLBH has grown from approximately $450 million in assets under management to nearly $1 billion. The partners have one big regret: “That we didn’t do it sooner.”

The obvious question is this: How, in the middle of the worst market downturn since the Great Depression, did this group manage to not only grow, but to nearly double its assets? The two partners sat down with Howard Diamond, managing director of Diamond Consultants, to give us that answer … and then some.

[Editor’s note: Diamond Consultants recruits from Merrill Lynch.]

Howard Diamond [wife Mindy's hand on shoulder] showed that Socrates has nothing on him in his reporting methods with breakaway brokers.
Howard Diamond [wife Mindy’s hand on
shoulder] showed that Socrates has nothing
on him in his reporting methods
with breakaway brokers.

Roads to Merrill

Howard Diamond: So, here we are in Westport, Conn., in the beautiful office of LLBH Private Wealth Management, with two of its founding members, Jim Pratt-Heaney and Bill Loftus. OK, gentlemen, tell me first a bit about your background.

Jim Pratt-Heaney: I wasn’t one of those that came right out of college into this business. I was a schoolteacher for 15 years back in the ’70s and ’80s. After our second child, my wife decided not to go back to work, and I needed to get a job that paid more than $15,000 per year. I started at the age of 38 at E.F. Hutton in their training boardroom with the 22-year-olds, with pizza call night, making cold calls. From there I went to Prudential Securities for a number of years, where I met and partnered with Bill Lomas. We then went to Smith Barney for several years, where we met the other two principals of LLBH, Bill Loftus and Kevin Burns. We then all moved to Merrill at varying times. I was there for about 10 years before we went independent.

Bill Loftus: I had two stints at Merrill. I started there in 1985 in their training program and left in 1988. I returned 1998, and stayed until we all left in 2008.

H.D: So you started LLBH Private Wealth Management at what some would call the worst possible time, October 2008.

Jim Pratt-Heaney: Yeah, you could say that. Right in the middle of the storm.

H.D: What amount of assets under management were you able to move a at that time?

Bill Loftus: Over the transfer process, I’d estimate that roughly $450 million transferred over, which represented about 95% or more of the relationships that we wanted to take with us. Today, assets under management are approaching a billion dollars.

Family value

H.D: To what do you attribute that growth, other than your hard work?

Bill Loftus: First, I think our model is exactly what clients are looking for now — independent, objective advice. We play the role of a virtual family office, so there’s a real value proposition that we can bring to the table. Clients want comprehensive planning, a platform where they can leverage high-quality money managers, a strategic relationship with us as consultant and the comfort of knowing that we are there every step of the way with their family in an independent and objective manner.

Jim Pratt-Heaney: If clients come in and their portfolio stinks or their trust work isn't right, we're going to tell them.
Jim Pratt-Heaney: If clients come in
and their portfolio stinks or their
trust work isn’t right, we’re going
to tell them.

Jim Pratt-Heaney: That’s really why we decided to form the firm. When we entered the private-banking and investment group at Merrill we thought we’d be able to offer our clients exactly what Bill just said. See: Fearless Merrill Lynch team breaks away with $1 billion in broad daylight. We were the best of the best in what we thought was one of the best firms, and we were constantly frustrated by the restraints that were put on us. We knew what we wanted to do for clients, but it couldn’t be done at Merrill because we were constantly being told that “if we do it for you, we have to do it for 17,000 other advisors.”

H.D: Talk to me about some of the restraints that you faced.

Jim Pratt-Heaney: We deal with high-net-worth clients and they have certain things they want to do. For example, they might want to go to the ATM and take out more than maybe somebody else wants to take out, little things like that. Or, a client might call from a plane and say, “Please transfer money,” and hand the phone to his wife and not write out a letter. On a larger scale, clients wanted to know that when we say, “We’ve looked at all the money managers in the world and we think this one is the one you should use,” we’re really looking at all the money managers, not just the list that the firm happens to have.

DIY

H.D: Were you guys prescient? You obviously didn’t just decide in October to move. Was there any one event that made you decide to pull the trigger and leave?

Bill Loftus: I guess there was an element of prescience. We were in the private bank and our goal was to have this elite team that could deliver incredible products and services to our clients. There wasn’t that big a difference, however, between the product offering through the private bank and what the normal rank and file were getting. We became fed up and decided to build it ourselves.

I do remember a few other frustrations. One was we wanted to place an ad in a local magazine, but compliance wouldn’t allow our pictures to be placed in it. See: Advertising practices that can raise the hackles of regulators said we had to use actors. So here was this ad with our names in it and all we heard from clients and friends in the community was “Who are these guys? Did you hire new folks?” And the answer again was, “If we let you use your pictures, then everyone else will want to use their pictures. We can’t have 17,000 pictures out there.” It was a little thing, but little things just kept adding up and impacting us greatly. See: Hou-Sear team can’t always beat RIAs so it joins them.

H.D: So you did your due diligence — briefly, what did that look like?

Bill Loftus: We looked at Goldman. We looked at Morgan Stanley. We looked at some of what I’d characterize as midway points like Wells Fargo’s FiNet. And the conclusion we came to was that the only way to really deliver this the right way was to deliver it as a registered investment advisor and own our own business. At that time, we became familiar with Focus Financial Partners, LLC. We understood their value proposition and how they could assist us in making this transition, and that’s ultimately why we ended up going with them. See: RIAs join Focus Financial with their own acquisition plans.

Bill Loftus: The easiest decision we made was that we were not going to go to another huge brokerage house.
Bill Loftus: The easiest decision we
made was that we were not
going to go to another huge
brokerage house.

Jim Pratt-Heaney: We liked Focus right away. They appeared to have a very deep bench, strong management capabilities and a very robust platform to support our business. They came in and basically became our chief operating officer, introduced us to vendors, and helped us vet the custodians. By going with Focus, it probably moved us ahead faster, you know, by maybe six to eight months or something like that.

H.D: It would be astounding to some, that you walked away from life-changing money in the form of a transition package from another wirehouse firm. The check could have approached $20 million, right?

Bill Loftus: Yes, we were offered some huge checks and look, it was compelling. But we said to ourselves, “We know how this is going to end. We know, the best day of our life would be the day we cash the check, and then every day after that will get worse. And so we said, You know what? We believe in ourselves. The easiest decision we made was that we were not going to go to another huge brokerage house.

Jim Pratt-Heaney: Today, the philosophy of our firm is, if we can’t do something in-house, we outsource it. So that’s why we outsource the investments. We always look for the best of breed. See: How the breakaway movement is driving the outsourcing trend.

H.D: How many clients did your firm have in 2008?

Bill Loftus: Roughly 150.

H.D: Tell me a little about your clients and what you said to them after you left about your decision to go independent.

Bill Loftus: A lot of our clients are successful entrepreneurs, or they’re corporate executives and they’ve made good decisions all their lives. We told them “it’s come to a point in time where we’ve got a dream about the way that we want to serve you, and we don’t believe that that dream could have been fulfilled under the current scenario at Merrill Lynch. We spent the last 12 to 18 months really looking at options, and we’re convinced the only way to serve you best is as an independent business operation. The net effect is that this is going to be a major uptick for you in terms of the way that we serve you and your family, and we’re convinced that, after looking at all the options, this is the best option for you.”

H.D: And the response was?

Bill Loftus: Overwhelming. “Sign me up.” It really came down to our clients’ relationships with us.

'These guys care about us’

H.D: How long did it take for the clients to come over?

Bill Loftus: The majority of clients came over within a couple of months. You had 15% volatility in October of 2008. You probably had 15% market swings in November of 2008. The first two months of February 2009, the market was down 20%. So, a lot was going on.

We told ourselves, on April 1, “OK, transition over. If they’re not here, so be it.” And then in the summer of 2009, something very significant for LLBH happened. We’d gone to a few conferences, and we saw a trend developing, whereby wealthy people wanted a comprehensive strategic relationship, kind of like the models of family offices. We saw it early, and we said, “OK, time out. We’re going to completely modify our process, and we’re going to become the family office for people who traditionally can’t afford their own family office, but we’re going to offer the same type of services that the ultrawealthy are offered.

H.D: Family office for the high-net-worth set?

Bill Loftus: Correct. And that’s our model. See: A $6-billion multifamily office highlights its home-cooking approach to picking boutique managers with a star hire.

H.D: Could you talk to us about what you offer in this family office model that you couldn’t offer previously?

Jim Pratt-Heaney: One thing we offer is concierge services and things like that, and we decided to step up the planning side and take responsibility for everything our clients have. We’re brutally honest with them. If they come in and their portfolio stinks or their trust work isn’t right, we’re going to tell them.”

Bill Loftus: So the average planning exercise went from spending maybe 10 hours on a financial plan at Merrill, to now spending 50 hours on a financial plan for every new engagement. We dig through the documents, we do extensive trust and estate document reviews, we do tax return reviews, we do very detailed plan designs that are very sophisticated. Again, we are not selling product, or silo kind of stuff like you get at a firm, but literally, what the Jones family really wants; what’s going to make their life better. And we started thinking about our clients that way, and it’s made all the difference.

Jim Pratt-Heaney: All the technical stuff is impressive, but it all gets wrapped up into the fact that “Hey, these guys care about us.” And so the most interesting thing is, we always say, “Look, we’re going to be dealing with you, your kids and grandkids.” So that’s when they now ask us, “Well, gosh, when you’re gone and I’m gone and LLBH is taking care of the kids, who at LLBH is going to be doing it?” So we’re starting to articulate the plans we have in place for succession planning and all of that. Can you imagine a client worrying about our firm after they’re dead? So, we’re not worried about them leaving us next month. We’re worried about who’s going to take care of their grandkids.

H.D: How about your client transition process? Did anything go wrong?

Jim Pratt-Heaney: No, nothing really. Considering the fact that we moved, let’s call it 150 relationships with 2,200 accounts, and each of those accounts has between 30 and as many as 80 positions. So work the math out, and you’re talking about transferring somewhere between 600,000 to a million different positions. We did it, I would say, virtually error-free. So when you put it in that kind of perspective, the transition was very smooth.

H.D: And now, four years later, describe a little bit about why you’ve grown so quickly.

Shopping the swap

Bill Loftus: We’ve grown because we have been able to think outside the box and do things for clients that we could never do at Merrill Lynch. Here’s an interesting example: We have a client who is an executive of a firm. He left the firm and 80% of his net worth was tied up in a deferred-comp plan there. The prior firm is a well-known Fortune 100 company. But we did the planning work, and we said, “You know, if something happens to this deferred comp plan, that could be materially bad for you.” At the time the company was pristine, no problems. We suggested that we write a credit default swap on that company. We went to “the Street,” we shopped it for him, we negotiated the transaction with the investment bank where we ultimately did it. He’s 100%, covered with this credit default swap against anything materially bad happening to that company. Well, the company is located in a country that in the last 12 months has had a major earthquake. They had a breach where three-quarters of client information was penetrated, which could be catastrophic, and the company’s stock price is down about 70%. Senior management is in disarray, and the credit rating, which has historically been AAA, is under review. We didn’t charge the client for the CDS because it is embedded in our management fee. His colleagues thought he was crazy at the time, but of course now they are saying: Can you do that for us?

H.D: To be clear, do you believe you could have obtained the same result for your client at Merrill Lynch?

Jim Pratt-Heaney: Maybe yes, maybe no. As an advisor at Merrill, we were limited to the solution set offered by the firm. Even if Merrill would have allowed us to create this scenario, their product would have been our only option, which may not have been at the best price for our client. As an independent, we were able, to shop the swap to four different banks and come up with the one that yielded the best result for the client.

Bill Loftus: Also, we see clients coming in and they’re paying fees that are just phenomenal. Our fees are totally transparent. We stamp them right on our performance report and say,“This is what you’re paying LLBH. This is what you pay the managers. We don’t get a penny from the managers. We have no financial relationship with them. We get all our money from you.”

Wallet share

H.D: How many relationships do you have now?

Bill Loftus: It’s still roughly 150. But our real growth is in the size of the relationships, as opposed to the number of clients. We purposely left some relationships behind at Merrill because we now charge fees on all assets, and that wouldn’t work for some types of our clients.

H.D: You’re getting greater wallet share, fair to say?

Bill Loftus: Very much so. I mean, the average new relationship for us has grown, since we became an independent firm, by probably three- or fourfold. Also, recently we added about 30 much larger households. We figure that around 60% of our assets come from new clients, 40% from existing.

H.D: So any surprises, regrets or things you would have done differently looking back?

Jim Pratt-Heaney: Our stock answer is always, what the hell took us so long? I wish — I really do wish — we had done this years ago.

H.D: What specifically, can you do for clients now, that you couldn’t before?

Bill Loftus: We can go out and find the best trust and estate planning firm rather than use the in-house team. We can price out special things for clients and go to multiple firms. We can talk to Goldman. We can talk to RBC. We can talk to Deutsche Bank. We can talk to RBS, and really do independent work for clients and get them best pricing. We can actually go out and build investment products. If we think that we’ve got holes in our portfolio, and there are some things that can actually add value, increase return and reduce risk — we can go to the best-of-breed providers and get things built specifically for our clients.

H.D: Is that one of the biggest changes you’ve experienced?

Bill Loftus: For me, it’s definitely one of the biggest. It’s the concept that you’re working with people who WANT to work with you rather than HAVE to work with you.

H.D: And your pipeline today? What percentage of business do you close?

Bill Loftus: It’s almost 100%.

H.D: What advice would you give to another wirehouse advisor who was thinking about going independent?

Jim Pratt-Heaney: I would tell them if you have thought about being independent, then you have to do it. And the complications, like “How am I going to run a business? How am I going to do compliance? Who’s going to clear the checks?” Forget it. This is a very easy business to run. I think with most brokers, their biggest enemy is inertia. And there is the possibility of a large transition check hanging out there and all of that. But if they really want to build something that’s going to last into the future, maybe beyond them, then they must do it. There’s so much help out there. Take the time, get educated, go all the way through the process, and if you don’t do it, you don’t do it. But don’t stop yourself by saying, “Oh, it’s going to be so hard to run a business.” It’s easier to run an independent business than survive in a brokerage house.

Bill Loftus: I’d add a couple of things. Number one, do some self-evaluation. Are you really an entrepreneur or are you best suited inside a firm? Either way, you can still go independent. And then the second thing would be, take a really good look at your practice and ask yourself if it is an independent practice. If it is heavily dependent on research or heavily dependent on trading for cents per share or things like that, you’re probably not best served in an independent environment. But if it’s a fee-based, planning oriented, objective-advice practice, independence is the way to go.

Growth plans

H.D: How do you spend your days today?

Bill Loftus: 100% of my time is focused on clients, and it’s thinking about creative strategies, ways to help clients make more money, save money on taxes, transfer assets to their children in a more efficient way and to protect themselves from risk. A lot of my time is spent on a white board just sketching things out.

Every single client that we work with is done by hand. There’s no cookie-cutter stuff happening here, and all we do is think, and then communicate our thoughts to our clients.

H.D: Talk to us about plans for future growth and what you see LLBH looking like five or 10 years from now. You indicated before we started talking that you were looking to grow inorganically by bringing on another advisor as a “tuck-in” (i.e. a sub-acquisition).

Jim Pratt-Heaney: In this industry tuck-ins are a big deal right now. Our organic growth has been so fast and furious and we haven’t really thought about inorganic growth. But both Focus and Pershing have provided us with opportunities. See: What headway Pershing’s RIA unit is making after four years under Mark Tibergien. Today we talked to a sole practitioner who is looking to join a firm like ours, and actually, we were pretty excited about it.

Bill Loftus: We just talked to the advisor for the first time, but [bringing someone new on is] something that we think we can do without stopping. And this person is super-qualified, and so — we’ll see how it goes.

Jim Pratt-Heaney: And we’re starting a relationship with an investment banking firm. We have another RIA firm that does some advance planning work for us. We call them in, and then we do some profit-sharing on insurance. So all those kind of things. That’s the fun of doing this. That’s where the entrepreneurial fun comes in. We are building our own company.

Being free

H.D: Anything else?

Bill Loftus: I hope to be a national presence, with a very well-defined and consistent process in each of our different locations. See: Barron’s top advisor shares the secrets to his success with rapt RIAs at TD event. I think that we will continue to build out our range of services so we are a true family office, where we can look at business deals for clients and evaluate them, tell them what they own in certain kinds of transactions, help them with the plan design and strategic planning, not only for their business, but for what we’re doing right now for the personal investments; help educate their family members in wealth management and being good stewards of money and helping them transition the money to those people. And, have the best, most robust investment platform anywhere, and deliver it all in an independent and objective manner.

H.D: Last question. Finish this sentence. The best thing about breaking away is —

Jim Pratt-Heaney: — thinking for yourself, being free.

Bill Loftus: Focusing exclusively on clients and not any of the extraneous things that happen at large firms.

Howard Diamond is managing director of Diamond Consultants in Chester, N.J.