RIABiz goes to New York in search of RIA life in the land of investment banking giants

The independent space has been built around discount brokerages and upstart entrepreneurs, most with headquarters far from the historic home of finance in Manhattan.

But there are signs of independent life in New York City – and more of them every year, it seems. Last week, I traveled by rail from Washington, D.C. to the big city to meet with executives of two of the companies we’ve been covering in RIABiz: Dynasty Financial Partners and Focus Financial Partners.

Both of them, coincidentally, have offices on the East Side on 54th Street.

Dynasty Financial Partners

Dynasty’s office, complete with a view of Central Park, is on the 39th floor of a skyscraper on Sixth Avenue, right across from the UBS building.

The company burst on the scene in late last year – with media tripping all over themselves as they tried to summarize exactly what this group of former high-up executives at Citigroup is trying to do. Dynasty is building a platform of vendors, from those providing technology to investment research to asset-backed lending, that big advisors can access in total or in part, for a fee of less than 30%. See: What exactly is Dynasty Financial Partners and why is the Smith Barney execs’ startup gaining so much attention?

“We’re Levi Strauss during the Gold Rush. We’re selling the tools,” says Shirl Penney, CEO.

The gold rush, of course, is the shift of assets from the wirehouse world to the independent space. Dynasty executives are competing with the wirehouses for the allegiance of big advisors – their two arguments are the benefits of the independent model for clients, and the fact that the Dynasty platform is a lot cheaper compared with that of the wirehouses, which typically take 60-65% of a big advisor’s revenue.

“We all believe this is a unique time for a mature industry,” Penney says. “We have the chance to change the service model from one that’s broken.”

I met with Penney and COO Ed Swenson in what will eventually be the small library of their new office. Todd Thomson, the former chairman and CEO of Citigroup Global Wealth Management, who is Dynasty’s chairman of the board, wasn’t around, but I spoke to him by phone this week. See: Q&A with Todd Thomson.

Dynasty had to knock down some walls and hasn’t yet assembled the office where the executives will sit, together in one big corner room, at carved wooden desks. Despite the impressive view, it’s no Taj Mahal.

New York is big but the
RIA business is mostly elsewhere. Is
that starting to change?

Penney is former director of business development for global wealth advisory services at Citi Smith Barney — but his path there wasn’t paved with family ties and boarding school diplomas. Born to a teen mother and raised with the help of welfare checks by his step-grandfather, he has the air of a man who is a little impatient with the world he inhabits now. He’s out to change it.

The restlessness reminded me of the feeling I got from Sandy Weill. When I interviewed Weill (in his much more palatial office) some four years ago, I saw a big photo on the wall of the plain house where he grew up, in Bensonhurst, Brooklyn.

Swenson, Penney’s best friend, was a portfolio manager at Legg Mason (after previously working at Citigroup). He handles the internal operations side of the business. They worked on the business together for two years before launching – both of them turning their apartments into war rooms for the business.

Dynasty has so far lured two RIA teams to its platform: one led by Mike Brown, advisor from U.S. Trust with $5.9 billion of assets under oversight, who greeted me with a wave from his corner of Dynasty’s trading floor. Brown became a partner in Dynasty in December; his team is a source of revenue for Dynasty and basically serves as an in-house tester for the Dynasty platform.

Dynasty more recently won the business of its first RIA to come aboard on the model it hopes to keep replicating: Alan Harter. See: How Harter broke away from Morgan Stanley Smith Barney to find new vendors — and found old friends.

The Dynasty executives say they are aiming to serve RIAs with $500 million or more in AUM, though some in their pipeline are smaller.

It’s strange to call a company occupying an office with a view of Central Park and winning billion-dollar advisor’ business scrappy — but that’s the sense I had at the Dynasty offices. The company is still in the midst of negotiating vendor relationships. The industry, meanwhile, is watching for its next win.

On top of the relationships already established with Schwab, Fidelity, Black Diamond and Callan Associates Inc. Associates, Dynasty has just added trust services with Cypress Trust Co. in Palm Beach and the South Dakota Trust Co.

“We wanted to find brands in the independent space,” Swenson said. The company builds its vendor relationships around revenue share arrangements.

The duo also told me the company is about to announce a relationship with a middle-market bank , which will enable RIAs to offer their entrepreneurial clients business lending services. RIAs can also access non-security-based lending from JP Morgan Chase and Deutsche Bank.

Finally, Penney and Swenson invited me to a conference in early May – where they intend to sell the advantages of the independent space to wirehouse brokers.

That’s one advantage of locating your company in New York: It’s the richest market of potential breakaways on the planet.

A visit to Focus Financial

I was in town not so much to get to know Focus Financial Partners – we’ve written many stories about the largest aggregator in our business with $40 billion in AUM – but more to drill down on an area of specific interest. See: This generation of advisor aggregators puts the roll-up ghosts to bed, for now.

As we begin work on a project for the summer (more on that at a later date), I wanted to ask Rudy Adolf, CEO, about how the RIA business as whole could differentiate itself from the wirehouse world.

Before starting Focus, Adolf was senior vice president and general manager of the American Express Global Brokerage and Banking division. As a former top executive at one of the most valuable brands in the business, I thought he might have some insights into marketing.

The fact that I got some new insights into Focus turned out to be a bonus. (Dropping by the East Side of Manhattan near the Lipstick Building was also fun – it always brings back memories: Crain Communications, where both Brooke and I have worked, has its New York office just down the street.)

I met Rajini Kodialam, Focus co-founder and managing director, who was fast with insights into how individual RIAs can improve their marketing: by, for instance, starting systematic referral programs, and getting advisors to “have the conviction” that marketing is crucial.

Adopting a marketing mindset is not easy in a business where so many of the practitioners are CPAs or similarly numbers-minded people, Adolf and Kodialam said. “It’s just not in their DNA,” Adolf said.

I can’t say that I walked away with a magic marketing bullet. What I walked away with instead, is a conviction that the independent space grows almost in spite of itself.

As Adolf said, if independent advisors spent more time thinking about how to market themselves and by inference, independent advisors in general, the asset flight from the wirehouses would be even greater than it is.

The Focus duo’s benchmark: 30%. An executive at the firm should be spending a solid 30% of his or her time figuring out how to win more clients.

Focus Financial sports a wall that speaks to both its growth and the maturation of the independent space since 2006, when it was founded.

The wall is divided into three areas: one includes the names of 18 large practices that are partners in Focus; a column that shows two affiliates, which Adolf and Kodialam explained as partners in waiting, and one that shows the 19 tuck-ins to the larger practices. See: After one-year hiatus, Focus Financial buys a large RIA and hits a milestone and Focus Financial looks more like a consolidator-of-consolidators as its partner firms go on buying sprees.

Rudy Adolf: I would short every
stock of every wirehouse.

“It would be really, really powerful if the industry as a whole did something about creating a marketing mindset,” Adolf said. “I would short every stock of every wirehouse.”

This story was revised to correct the spelling of Rajini Kodialam’s name. RIABiz is sorry for the error!