Breakaway story: How Merrill Lynch breakaways built a firm that's adding advisors, and assets at $2 million to $5 million a month

Elizabeth’s note: I’d heard of XML Financial Group in suburban Washington, D.C., even before giving the partners there a call to set up an interview. Its success has served as an example to several firms. When I was writing the piece, I decided to lead with a war story about the firm’s breakaway in the bygone, pre-protocol era in the early 2000s. Attorney Brian Hamburger says breakaways at that time typically got hit with papers anytime from the evening of the departure to early the next week. “It was a crazy time that led to a lot of sleepless nights for me,” Hamburger says.

In the weekend after Rob Kantor, Brett Bernstein and Mike Jacobs broke away from Merrill Lynch, Kantor remembers nervous days and nights as the team pondered what they had done. This was 2004, before breakaways were common. 

Their office space wasn’t ready. They had no idea how many clients would follow them.

Then, a couple of days later, as they were beginning to piece together their new business, XML Financial Management, a FedEx package arrived. It was a formal notice that Merrill Lynch was suing them. It was expected, but still unnerving to see all of their names on the official court documents.

“Merrill Lynch came after us, saying we stole everything,” says Kantor. “We knew they would, but … that was a little overwhelming.”

As breakaways did back then, the team had hired an attorney and consulted its new broker-dealer, LPL. The Protocol for Broker Recruiting, which makes it easier these days for brokers to break away without facing legal action, wasn’t in widespread use. 

According to Kantor, one of the key facts on their side was that Merrill Lynch had used the same affidavit form for about 30 actions it took against departing brokers. 

With that fact in hand and details about how they had kept within the boundaries of their Merrill non-solicitation agreement, the trio negotiated a settlement. (Kantor says he’s not free to reveal the details).

Merrill Lynch did not respond to a request for comment.

Eastern Europe effect

The lawsuit was a rough, though not unexpected, start for the new firm, which was since grown into a $350 million AUM operation in Rockville, Md., and serves as an example to other breakaways in the region. 

Indeed, the company is a prime example of what Mark Tibergien, CEO of Pershing Advisor Solutions, has compared to immigration from Eastern Europe in the early 20th century. See: Wrapping up INSITE: Execs on the growth of the advisory business — and what might endanger it. 

Existing breakaways send letters from the metaphorical new world.

The XML team spoke with the breakaways of Monument Wealth Management,

 Two years later, a Merrill Lynch breakaway team has no regrets, based in Alexandria, Va., and of Key Financial Group,

 How a team in Maryland’s largest small city is finding clients among a cadre of fellow entrepreneurs, when those former Merrill Lynch brokers were considering leaving.

“We knew Mike and Brett and Rob,” says Jason Jennings of the latter firm. “After they went and were successful, more people started to wonder what was outside the Merrill Lynch bubble.”

Kantor had considered leaving Merrill Lynch as early as 1999. Then came the Internet bubble. Then the Henry Blodget scandal, in which e-mails written by the star analyst when he worked at Merrill Lynch made clear that he was making recommendations in part to drive business to Merrill’s investment banking arm. That scandal confirmed the three men’s doubts about the ethics of the system they were working in.

They were not directly compensated extra money for selling proprietary products. But sales of the products weighed heavily when it came time for the biggest producers to be named. They were also asked to push “the product of the month,” says Bernstein, whether it was credit cards or mortgages. Merrill’s current emphasis on banking products is one reason cited for the early success of its acquisition by Bank of America.

In 2002, they began discussing a potential move, and looked into many options, including Schwab, Fidelity and New York Life. They settled on LPL in part because it was the largest IBD — and they wanted the support of a large organization. Other Merrill breakaways make other choices. See: This Merrill Lynch team leader broke away for fear of what might happen under Bank of America

Brett Bernstein

The three areas XML focuses on

The past six years has been a time of evolution for XML. The firm has grown from the $110 million in AUM that the three men brought with them. Over time, they have focused on three distinct kinds of business:

• retirement services, which account for 35-40% of their revenue
• services to small businesses and nonprofits, which is about 10% of revenue
• serving individual clients, which accounts for about 50% of revenue. The firm focuses on Baby Boomers with assets of $2-$20 million.

They were thrilled to discover the array of investments they could offer clients, and have shifted more into funds.

“We basically uncovered this whole world,” Bernstein said. “There’s less risk and better performance.”

XML markets heavily, using interns to make cold calls, sponsoring charity functions, and holding seminars.

“We just try to get our name out there as much as we can,” Kantor says.

Mike Jacobs

XML aims to grow its assets by at least 4% a year, and brings in $2-5 million a month. The firm’s assets are now 10% above their previous peak in 2008.

Two offers to buy the firm

The company has hired three assistants and just this summer brought on two new advisors, for a total of 12 employees, including the three partners.

As they see it, they have created a vehicle – now it’s just a question of adding more wheels to make the whole operation grow faster.

Their success has drawn attention, and XML has twice entertained offers to sell the firm. In the first case, an offer from a private equity firm, the partners decided their growth was too strong to give away so much equity up front. In the second case, a large insurance company made an offer that would have had XML merging with an asset manager; the team decided they didn’t have enough control over that situation.

Although the men are highly analytical when it comes to helping their business grow – and speak highly of the training they got at Merrill Lynch that helps them now – they are laid back in one respect: attire.

When Kantor was still a Merrill Lynch broker, he stopped by the office on a Friday that he’d taken off. He wanted to check on something. His manager looked askance and even told him he shouldn’t be in the office.

The reason? Kantor was wearing khakis.

So what’s the “uniform” now in the XML office?

Golf shirts and khakis.

Elizabeth’s note: I’m wondering if readers clued in to the firm’s name? I realized only about halfway through the interview. XML stands for X-Merrill Lynch.

The story was adjusted on Sept. 9 to correct Monument Wealth Management’s name.