Clients embrace idea of new RIA with quick signings
On the evening David Hou and his partner Mark Sear had left Merrill Lynch to start their own RIA business, Hou had wondered if his father would be able to make sense of the move.
Hou had always felt out-of-step as a business school grad in a family of engineers and doctors; his engineer father, a Chinese immigrant, had wanted Hou to have a trade he “could fall back on.”
Now Hou was about to risk it all on his own business.
His father took the move in stride. “I said, go for it,” James Hou recalls, after his son had explained his rationale for leaving Merrill Lynch. The elder Hou says his son has the kind of drive that means a father doesn’t ever have to worry much about him.
“He worries a lot,” he said. “In high school he wrote everything he wanted to do on a list at night and put it in the bathroom (for the next day).”
This kind of drive is a hallmark of all the partners in Hou-Sear and it was on full display the Saturday after Luminous Capital sprang into being. The partners began a mad scramble to sign all of the former clients they could.
They knew that the longer they waited the more likely it would be that Merrill would reach the clients with an argument for why their money ought to stay at the wirehouse.
Sear woke at sunrise and then drove to his first of five client meetings scheduled at two-hour intervals throughout the day. The goal was to get the documents signed and move it along.
Problems right away
He ran into problems right away. His first client asked for copies, but she had only a fax machine doubling as a copier, and it proceeded to break down under the strain.
Sear had it in pieces all over a table. “I was sweating” he said. His whole day’s schedule was being derailed and he was untrained in facsimile machine repair. But when he reassembled the machine, it dutifully made copies for him.
David Hou was behind the wheel of his car by 7 a.m. for a drive down the Orange County coast. He made a series of stops in Newport Beach, Palos Verdes and other communities inhabited by the kinds of clients with $10 million or more to invest. Under the all-hands-on-deck circumstances, Hou’s wife, a former office manager for Merrill Lynch, flew to Phoenix to get signatures from clients there and in Tucson.
Hou’s partners hopped planes Saturday morning for Denver and Silicon Valley, where most of their clients lived. Mark Sear flew to New York on Monday morning to get signatures from New York clients, and Hou flew to Miami to reach a client there.
At each visit, the partners explained to clients why they’d felt it was important to make the move. Among other things, they pointed out, Luminous Capital would be able to outsource its asset management to the asset managers it thought best, instead of those chosen by Merrill. Merrill’s limitations were most glaring to Hou and Sear when it came to finding and providing access to the kinds of “boutique” managers they believe maximize returns for clients.
The frenzied business re-formation worked. Not including pension assets and other corporate assets administered by Merrill Lynch, Luminous was successful in reconstituting its book of business. It got 95% of its high net worth and endowment clients and 93% of its former managed assets to follow from Merrill Lynch, or about $1.7 billion, Sear says.
Hou and Sear didn’t consider 93% worthy of cork-popping.
On the night of May 9, 2008, a client had dropped a magnum of fine champagne at the Luminous offices. The partners decided not to open the congratulatory bottle until they reached $2 billion of assets under management. It sat in their refrigerator for several months but new accounts – and some old accounts that took a while to transfer — buoyed them past their target this spring.
When the cork popped, the partners allowed themselves to exhale.
What Hou-Sear did for the RIA world is not unlike what Tiger Woods did for golf. Before he appeared, golf was the realm of soft white men who didn’t make the varsity basketball squad; afterwards, it had become a sport of chiseled triceps and pure athleticism.
Before Hou-Sear’s move, breakaway brokers were the desperate misfits of the wirehouse world. Afterward, breakaway brokers could be seen as shrewd entrepreneurs looking to capitalize on their success as employees. In the wake of Hou-Sear’s breakaway, RIAs, breakaways and prospective breakaways could be seen as winners instead of losers, say recruiters, industry consultants and regulatory attorneys.
Level of confidence
The Hou-Sear breakaway helped inspire four Merrill Lynch advisors to form LLBH Group Private Wealth Management, which manages $650 million from Westport, Conn,, according to its partner, Bill Loftus, 51.
“We were talking to [an attorney from The Hamburger Law Firm] in July of 2008 and we asked how Luminous was going,” he says. “They said: Mark and David are doing great. That [knowledge] gave us a level of confidence. Their clients are high-end. Our clients are high end. When we saw Mark and David’s clients follow them, that told us something.”
Leaving the womb of Mother Merrill [Lynch] was not without its hard knocks for David Hou, Mark Sear and the rest of the Luminous Capital team. In a future posting, we’ll look at what makes Luminous different from Merrill, what kinds of clients they are winning under the Luminous banner [think big ones] and how they plan is to grow organically and by acquisition into a $20 billion practice in 10 years.
Note: To read the Hou-Sear story that precedes this one, click here