The former Smith Barney chief is mentoring his young colleagues and raising capital from Wall Street veterans

March 24, 2011 — 2:51 PM UTC by Elizabeth MacBride

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Todd Thomson, the former head of Citigroup’s wealth management division, is the highest-profile convert from Wall Street to the independent model so far. He’s putting his shoulder behind the effort to develop an outsourced platform with the bells and whistles necessary to attract larger, more coddled “corner office” brokers on Wall Street.

Though Thomson is thought of as a wirehouse exec — he was also CFO of Citigroup — he has had experience building a business from the startup level. As a partner of Barents Group, an operating subsidiary of KPMG, he founded a merchant bank, building it to 12 global offices in four-and-a-half years. At Citi’s wealth management division, he told RIABiz, he took steps to untie the connection between the product and advisory sides of the business, moving asset management to an open architecture platform and eventually selling it to Legg Mason.

Now, he’s hung his hat at Dynasty Financial Partners, a company he helped form with two protégés. The company grew out of a series of informal meetings that Thomson had with people interested in the independent space. Shirl Penney told me that of that group, he and Ed Swenson “hustled” and came up with a workable business plan. Thomson signed on formally last year and lined up investors and board members, including William Donaldson and Harvey Golub. See: RIABiz goes to New York in search of RIA life in the land of investment giants.

This Q&A was conducted by phone; Thomson offered clarifications by e-mail afterwards, most of which I accepted.

Thomson was ousted from Citi by then-CEO Chuck Prince at a time of management turmoil at the company. Sallie Krawcheck, one of his rivals, didn’t survive at Citi, either; she now leads Bank of America’s wealth management division — meaning that she’s in charge of Merrill Lynch’s thundering herd and U.S. Trust, from which Dynasty snagged its first Wall Street broker. See: Sallie Krawcheck, A Recruiter’s Nightmare.

The details of Thomson’s departure aside (the split was exhaustively covered in the media), observers say that Thomson was still a hot property on Wall Street. In this interview, he talks about the thinking that led to his decision to start Dynasty, including the long-term trends in the market share of assets under advisement.

Q: Why did you decide to jump to the independent space?

I’ve been involved in the wealth management area ... for more than a decade.

I spent a lot of time during that decade paying attention to the changes in the industry. ... There was a long-term very distinct movement of assets and advisors to the independent advisory model. Twenty or 25 years ago, almost 70% of the assets in the industry were in wirehouses and bank. That share moved to only about 30%.

There was an equal movement to the independent space, and to what I call the technology players … Schwab, E*Trade, TD Ameritrade.

The technology players were picking up the people who wanted to do it themselves on these well-designed platforms.

(Amongst the high-end clients) the independent guys picked up almost everything the wirehouses lost.

What I came to realize was that the right way to serve clients was to serve them in an open-architecture, independent way … Over time, you would expect that to be the winning model.

The other part of my thinking was that today, that Wall Street brand, that business card that had been a plus and maybe even a necessity is now a negative.

Q: Even three years after the financial crisis?

The trust level is incredibly low. Most sophisticated families don’t trust those brands.

The other factor is that all the best products, the best thinking, the best money managers, used to be on Wall Street. Today, none of that is on Wall Street.

If they’re great equity managers, they’re in hedge funds. If they’re great fixed income managers, they’re at hedge funds, or BlackRock or Pimco.

The best technology for things like data aggregation and reporting… is, I would argue, Black Diamond, not what the wire houses use.

As an independent advisor, you now have access to better products and better thinking and better technology than on Wall Street – that’s a revolutionary change that’s happened in the last 20 or 30 years.

Q: Have you been involved in other ventures besides Dynasty?

In the last 2.5 years I spent a lot of time with a number of players thinking through the right wealth management business to launch.

I looked at a number of different wealth management and financial services acquisitions over the past three or four years, and led two small regional bank deals, one in Portland Oregon and one in Richmond, VA. I also spend some time advising other clients on acquisitions and strategy.

The more I looked at the wealth management industry and evaluated potential acquisitions, the more clear it became that there was a screaming need for a business to serve those “corner office” advisors with wealthy, sophisticated clients who are independent or want to leave a wirehouse or bank and go independent.

Q: What amount of time do you spend on Dynasty business and how would you describe your role there?

70-75% of my time right now is spent on Dynasty, and the rest is spent advising clients and on my other deals.

My role has been … to help develop Dynasty’s strategy and to mentor Shirl Penney, our CEO. And I spent a fair amount of time bringing the right investors to Dynasty for the capital we needed, people that I thought could add real value.

These are people that believe in our vision that the right way to serve clients is through independent, conflict-free advice and believe in it enough to write personal checks to invest in Dynasty. And several of them are prominent Wall Street veterans, who “get” the change that is happening in the industry.

Why not just hop to another big job at another big firm? That’s what guys like you usually do.

Honestly, I felt that at Citi I’d run the most interesting and challenging wealth management business in the world. We had, in a very short period of time, drastically changed the strategy to put our clients first … Operationally, we had tremendous success, with more revenue and faster income growth and higher margins during my leadership than the business ever had before or since I left.

I didn’t see other challenges out there I thought were equal to that.

I really enjoy the business building aspects. I enjoy coming up with ideas and strategies … which are very creative and disruptive to the industry. I find this incredibly exciting.

With what Focus Financial and Hightower are doing, with what LPL is doing, the RIA growth at Schwab and Fidelity … the rapid growth of the independent advisory industry is incredibly exciting. It’s quite simply a better model for clients and a better model for advisors – so it’s no surprise that this model is winning over time.

Q: How are Wall Street firms adapting to the challenge from the independent side?

I would say that I haven’t seen much evidence that the wire houses and banks have adapted. Remarkably, many of them still talk about their retail brokerage systems as “distribution” and expect to push their own investment products, derivatives, checking accounts, etc. onto their clients. I don’t know of any clients that want to be “distributed” to. They want straight talk and conflict-free advice.

What you’ll hear from those firms is that “the independents aren’t that important…we have a trillion or a trillion and a half dollars, if we lose a couple hundred billion, what difference does that make?”

They haven’t looked at the long-term trends more seriously.

This is a classic mistake that many companies make. If the industry is growing and they themselves happen to be growing, ... they miss out on the trend.

A decade ago, the industry was very slow to react to Schwab, Fidelity, E*Trade and the other technology players and lost a huge amount of clients and assets to these firms. The same thing is happening today as more and more advisors choose to be independent.

They’ve made some changes.

There aren’t any wire houses any more that offer purely captive investment products. Clients demanded that change, and the firms were forced to provide some choice.

So, most of them are now “quote” open architecture.

However, sometimes what they have on the platform is what they’re getting paid to put on the platform, not necessarily the best choice for the client. That remains somewhat of an issue. Also, there’s no open architecture on derivatives … or on lending. There’s a lot of elements of the wirehouse and bank platforms that are still very captive.

In most cases, finding the best choice for the client hasn’t been the objective at the wire houses; it’s finding something that’s suitable for the client and that’s good for the firm.

Are the changes you made at Citi still in place?


Q: Is there one wirehouse that you believe is more flexible than the others?

There’s a spectrum of flexibility at the wirehouses … but it changes with the leadership.

Q: Sallie Krawchek gets a lot of press for being open to new ideas.

I haven’t paid much attention to what is happening at B of A, although I do recall reading something recently where they were bragging to their shareholders about being successful at “distributing” more and more B of A banking products onto their Merrill brokerage clients. ... I also read where they apparently now require a 6-month “garden leave” for their US Trust financial advisors who wish to leave.

I guess that doesn’t seem too client-friendly if a client trusts and respects their financial advisor, and Bank of America tells them, sorry, we’re not going to let that advisor you trust help you with your financial needs for the next six months.

Q: What are the biggest challenges facing Dynasty, and the independent side in general?

We give advisors the ability to set up their own business, operate their own business and have a cost structure that they’re paying us 30% of their revenue as opposed to 60-65%.

They are able to have a complete, independent, open architecture set of capability. There is no other interest or perceived interest other than that of their clients.

And they’re able to build equity value for themselves and their families.

The model is unquestionably the best model for advisors who are willing to be on their own and have the courage to do that. It’s a compellingly better model for clients and for advisors.

So I think our challenge is mostly about execution. Making sure that we continue to provide the best hand-holding and service for advisors, and that we continue to curate the best thinking, products and technology for them.

Q. Forecast 10 years out for me.

It’ll be interesting to see. Independent advisors will continue to grow and take share. ... What I believe is going to happen is you’re going to see an acceleration of the larger teams with larger more sophisticated clients choosing to operate as independents.

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


Jeff Spears said:

March 24, 2011 — 4:24 PM UTC

Couldn’t agree more. The corner office advisors have NOT moved yet. What will make them move? Preasure to “cross sell” and preasure on payout. Both seem inevitable to me. If BofA can’t increase their dividend doesn’t it seem likely that they will try and increase cross selling of banking products/services? I’ve been at the table for these conversations before when BofA forced a coversion of client assets to Nations money funds.

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