Chip Roame sugarcoats nothing and it keeps 150-plus top execs on the edge of their seats

October 13, 2011 — 3:03 PM UTC by Brooke Southall


Brooke’s Note: Chip Roame continues to ride high as the leader of the industry’s most elite executive event. Last year, I wrote that the Tiburon CEO Summit is not for wimps. I was understating the case. It does well because the elbow-rubbing quality is par excellence but there is also no worry that you’ll be given industry intelligence gratuitously suited to your way of viewing the world. No bubble goes unpopped at this event that runs Oct. 12 to Oct. 14 at noon.

1.) There are changes afoot at Tiburon (Calif.) Strategic Advisors LLC . The company has for its 13 years in business been associated with one energetic individual, Charles “Chip” Roame, and he is still very much the ubiquitous force at his Tiburon CEO Summit conference, which kicked off yesterday at the Ritz-Carlton in San Francisco. But Roame is making three big changes by: working every other week, running research, rather than consulting, projects and looking for the addition of a “heavy-hitting” managing principal to pick up the consulting slack. Roame will continue to give speeches and one-day seminars. The goal of this major rearrangement of his schedule is to continue to be as present as practicable for his 3-year-old son. Kudos to Chip.

2.) Roame continued his tradition of dishing out tough love in his opening remarks by saying that nobody had been invited because for sentimental reasons. They pay Tiburon as an event sponsor or as a client for the privilege. He also let the crowd of financial services CEOs, financial advisors and other high-level financial executives know that they are not a beloved group by the American public (and joked that he might have brought in some Occupy Wall Street people). “You like to define yourselves as a silo, but consumers see it as one big industry. They don’t see you as an ethical RIA or a low-cost ETF provider. Most consumers when asked about the financial services industry say: they’re a bunch of crooks.’” Roame reminded that his conference has a consumer panel upcoming that would likely confirm these sentiments.

3.) Roame expressed both skepticism and optimistic enthusiasm about the movement of stock brokers leaving Wall Street wirehouses and regionals. He says that about 12% of advisors leave their positions at wirehouses each year but that 90% of them were fired. Of the 10% of breakaways who leave of their own volition, 70% choose to stay in the wirehouse world. Despite the paucity of true breaklaways, Roame says that RIA custodians such as Schwab Advisor Services and Fidelity are right to be excited about them. “They have boodles of assets.” Marion Asnes, chief marketing officer of Envestnet, asked Roame where the thousands of fired stockbrokers end up going. He replied that he believes many end up as independent-broker-dealer reps as reps but isn’t sure. Tif Joyce, an LPL rep from Sebastopol, Calif., spoke up to say he doubts many of them live to sell financial products another day. He used the example of having just bought a car and how staff members at the dealership were ex-wirehouse brokers.

4.) The time is fast approaching when the breakaway movement will shift into a higher gear, but things still need to evolve. “You ain’t seen nothing yet, but [breakaways] need more landing pads,” he said. Roame referenced the success of HighTower Advisors LLC as one proven landing pad but noted that it still only amounted to about 20 practices. See: HighTower is starting to run the poaching table in Palm Desert also praised the efforts of Schwab in spending millions of its own funds to promote RIAs in making the migration to independence more likely to accelerate. See: Schwab to pump millions of dollars into promoting RIAs as a channel.

5.) Despite this optimism, Roame warned that the wirehouses are about to unveil new strategies for taking the wind out of the breakaway sails. The threat of 350% retention bonuses is no joke. “That’s a seven-year payback.” But the new twist is his prediction that Morgan Stanley Smith Barney LLC, Bank of America Merrill Lynch and UBS AG are likely to develop “halfway houses” for brokers that want greater freedoms but would like to keep the organization and brand of their corporate employer behind them. Roame believes that such divisions will crop up within 12 months. “You’ll see some kind of halfway house announcements,” he said. Wells Fargo already has such an arrangement largely in place in the form of Finet, he added. See: FiNet’s wirehouse-lite model scores with advisors.

6.) One halfway-entrepreneurial venture that Roame believes is destined for success is Schwab’s plan to expand its branch network using independent operators. “I’m a big believer in the Schwab [franchise] initiative. See: Why Schwab is embracing a franchise-like strategy to fast-forward branch growth “It’s exactly in the spirit of The Charles Schwab Corp.” Roame cited his own positive experience of dealing with four or five individuals at the Schwab branch he uses in Corte Madera, Calif. He could imagine them successfully running their own branches. (Coincidentally, I use the same branch for my brokerage and banking and concur about a sense of competency from the front-end staff). Roame also said he knows of not-so-successful financial advisors in his town of Tiburon who might prosper under the structure and brand of a Schwab franchise.

7.) Roame also sees possible storm clouds on the horizon for the RIA custody business. He sees a world of aggregators, turnkey asset management programs and other outsourced platforms that are gaining critical mass and forming various flying wedges between the end RIA firm and its custodian. He imagines that as they grow they will increasingly seek to squeeze custodians on price. “Custody is a booming business but it could be a price pressure business going forward.” See: This generation of advisor aggregators puts the roll-up ghosts to bed, for now.

8.) Despite all the bad press about their parent companies and the number of advisors who choose independence, Roame pointed out that the wirehouses — on the whole — continue to thrive. See: FRC report: Merrill Lynch, Morgan Stanley, UBS, Wells Fargo are undergoing a radical transformation to a brighter future. Still, he allowed that with the exception of Wells Fargo Advisors LLC, the head count at those firms is diminishing. But the good news is that advisors still continue to enjoy tremendous client loyalty and their books of business remain enormous — especially compared to the $17 million managed by the average IBD rep. UBS reps top the list with $119 million on average in their books, followed by Merrill Lynch with $102 million, Morgan Stanley Smith Barney with $93 million and Wells Fargo at $61 million. Though UBS has the biggest average book, Merrill brokers still enjoy production on a par with that company — about $890 million per financial advisor — presumably because of more cross-selling and effective churn.

9.) The Tiburon CEO Summit yielded two interesting survey results. The Financial Industry Regulatory Authority Inc. was selected as the next most likely overseer of RIAs, and Roame says he concurs with the majority opinion. Perhaps more surprising was the breakdown politically in the room of suits and ties who somehow exude a love of tax breaks for the rich. There were 51% Republicans, 20% independent and 30% Democrats. I heard one person during a break saying they would have presumed 80% Republicans. Roame guesses that a higher number than usual of people from San Francisco may explain the statistical anomaly. He added that he predicts that President Obama will be re-elected.

10.) The meek and the mighty will inherit the management of assets. Roame anticipates that assets will for the most part continue to pour into passive investing vehicles — and top-notch hedge funds, bastions of active management.He mentioned the success of DFA. See: Dimensional Fund Advisors still has low RIA acceptance rate and stunning growth. Another piece of evidence: ETFs had net inflows of $121 billion in 2010, nearly half of the $246 biillion that flowed into mutual funds. This is an incredible statistic, considering the small base ETFs start from relative to mutual funds. Yet Roame also predicts that top hedge fund managers will be able to attract significant funds. Right now he says that hedge fund assets remain static despite many new managers’ entering the field. This shows that the big ones control the market. There are about $1.8 billion of hedge fund assets, up only a fraction from last year’s $1.7 billion and 2007’s $1.7 billion. The other trend in hedge funds is that the famous two-and-20 price structure is being dismantled by pension funds unwilling to stomach it.

Final Note: I was able to shake hands for the first time with a number of sources — such as Stuart DePina, chief executive of Tamarac Inc., and Neesha Hathi, head of technology for Schwab Advisor Services. I also got to hear from Andy Arenberg, managing director of global ETF distribution for Russell Investments’ about starting an ETF company using an all-star-crew of ex-Barclays guys — probably worthy of its own article. I had a good chat with Pat McClain of Hanson McClain, an RIA in Sacramento with more than $1 billion of AUM. See: Orion wins another RIA with $1 billion-plus in AUM. He told me his firm sees this as such a good time to be an RIA that he’s considering doubling the marketing budget from about $450,000 annually to $900,000.

Mentioned in this article:

Tiburon Strategic Advisors
Consulting Firm
Top Executive: Charles Roame

Share your thoughts and opinions with the author or other readers.


Jeff said:

October 13, 2011 — 5:24 PM UTC

Our breakaway research is even more conservative than Chip’s . We believe that 80% of the advisors that breakaway will join another wirehouse and that until retention loans start to vest the breakaway pool will remain below historic averages.

Our “landing pad” goals are for 50 teams over the next 5 years.

I think the 20+ teams HighTower has recruited is very impressive


Bill Winterberg said:

October 13, 2011 — 9:48 PM UTC

Custody might be a booming business, but it’s essentially commoditized today. There’s little difference in transaction fees and product access anymore across the major custodians.

Advisors aren’t choosing custodians based on price. I suspect they’re more concerned with the quality of service they receive when they have an issue, the functionality and integration of technology offered, and the practice management resources provided.

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