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Over the last 15 years, many investment advisors have been too embroiled with volatile markets and worrying clients to get an accurate glimpse of industry changes.
One of the reasons why many advisors are uneducated about member firms, is because there is an entirely different class of investment firm that is not the broker dealer. It is the modern – day discretionary money manager. This institution has become the fastest rising phenom to grab the headlines in the Canadian wealth management scene.
The purpose of this article is not to make value judgments; what is good/bad, better or worse. But simply to highlight some of the unique, compelling advantages that Independent discretionary money managers hold over brokerage firms. Let’s explore!
To be clear, a discretionary money management firm is only suitable for an advisor under the following conditions:
1.The Individual is currently a registered Portfolio Manager or Associate Portfolio Manager (aka, Advising Rep or Associate Advising Rep) with a current CIRO or OSC / AMF registration)
2.The individual is in process of / or in the final stages of being registered as a Portfolio Manager or an Associate Portfolio Manager. In this case, the individual must satisfy the following conditions:
In either of the above cases, the individual must hold a valid CFA Charterholder or CIM designation, or be in the final stages of obtaining either designation in order to be registerable. No other condition will suffice.
In general, a wealth advisor who is or wishes to become a Portfolio Manager because of their fundamental belief in managing clients on a discretionary basis, (without product or commission – based fees), would make a good fit for a discretionary manager. The main condition being there is a clear investment philosophical alignment between the candidate and the wealth manager. This is paramount.
Last, the Advisor or Portfolio Manager must hold ALL their clients in discretionary accounts. There is no mix. A true Investment Counselling firm manages discretionary portfolios only. Anything else falls outside of their core beliefs. It runs against their very core being. In such cases, the advisor/portfolio manager would be far better suited with a brokerage platform.
In just 15 years, we have witnessed an explosion of independent money managers across Canada in unparalleled numbers.
Here are some of the main reasons why advisors are exiting larger bank broker dealers for small independent discretionary managers.
Unlike many brokerage firms (with less profitable and reliable revenues), discretionary managers operate on stable recurring revenue models with set fees on a quarterly basis based on current AUM. From a firm and advisor perspective, this makes the business model far more reliable and economically attractive for owners and employees alike. Commission – based trading is out.
Discretionary management firms provide revenue stability and predictability. In sum, specifically HNW money managers enjoy the best margins in the investment industry today. Nothing competes with it. Its growth outstrips every other firm type.
For a wealth advisor looking to make a transition, unlike the traditional brokerage industry that has an ever-declining number of dealer members, there is an abundance of money managers across Canada covering every asset class and investment style. He is literally littered with choices.
To illustrate how popular they are, consider this: In 2009, there were approximately 100 money managers in Canada. Today, that number sits at well over 320 – and growing. That is a 300% increase in under 15 years. This reflects the growing trend of advisors leaving the traditional brokerage platform in favour of independent based money managers. The numbers simply confirm the narrative.
In fact, the ever- increasing perception among advisors that the five main banks are essentially the same bottle of wine with little distinction, confirms why they are moving to other independent money managers/broker dealers than they are competing banks. In the advisor recruitment world, it is the independent firms who are becoming the net winners.
In sum, the fact that there is greater diversity / variety of independent Canadian wealth managers as opposed to the same five chartered banks offering identical products, gives advisors the power to choose an investment platform that provides advisors with comfort and philosophical alignment. It also allows the advisor to make better choices because the firm is more aligned with his client’s best interests.
Unlike traditional trading/transactional business (which has steadily declined over the last 15 years), one of the biggest advantages of the discretionary business model is the profitability and long term sustainability of management fees. It is a revenue recurring cash cow.
Whether an asset manager is running model portfolios or/and pools, the margins on private client business are highly profitable. This enables the firm to achieve faster growth and scale than ever before. It also explains why private discretionary firms are growing whereas many broker dealer firms have remained stagnant. The sheer industrialization of model portfolios have allowed small to mid – sized wealth managers to achieve growth through new, sustainable recurring revenues, without incurring bank like infrastructure costs associated with it.
From a recruitment perspective, ongoing recurring income is an incredibly attractive benefit to operating within an independent discretionary environment. In addition, because of the fast growth rates, there have been far more acquisitions of money managers than their broker dealer counterparts.
In sum, both the stability of recurring revenues together with equity ownership in a fast – growing manager, make the Portfolio Manager the ultimate individual of capital with true liquidity.
An independent wealth manager offers the wealth advisor significant advantages: flexibility with respect to sales & marketing, wide open territorial coverage, access to vertical markets, US market access, a more versatile approach to compliance and in some cases, real participation in the investment committee.
In contrast with the bank brokerage environment, although the brokerage advisor has significant flexibility with regards to sales & business development, he is also competing with 800-2,000 of his fellow advisors (in the same dealer!) who are after the same target market. Indeed, his fellow ‘colleagues’ are his own biggest competitors. A true organizational internal conflict.
In every bank full – service brokerage, an individual advisor must reach between 60- 70M in Assets Under Management before the Bank will apply to have him/her registered as a Portfolio Manager. It is purely designed to get the advisor to ramp up their business to a certain asset hurdle before they become eligible. This can often take 5-10 years.
At an independent private wealth firm, Portfolio Manager registration is not tied to assets. So long as the individual has the required designation and relevant work experience, he/she can be registered. This is so attractive for many advisors who are in the process of building their own practice (typically 40-60M. Indeed, these individuals would not be able to be portfolio managers in any bank brokerage at that asset level. But they can be immediately registered at a private one, providing they meet the regulatory requirements. Even at 30M, most money managers will have you registered as a Portfolio Manager. (so long as you hold either a CFA or CIM)
In many ways, an independent, private wealth manager has the look and feel of a private club. Any discretionary firm is made up of a small collection of individuals whom sharen a similar philosophical style and commonly subscribe to a specific investment philosophy. It is a club of common rules and beliefs that bind a group of individuals together.
As opposed to pure quantity of assets the wealth advisor holds, it is the substance of the advisor’s own investment beliefs that will determine whether there is a true fit and alignment with the firm.
As opposed to a brokerage firm that operates much like a potpourri of individuals who think and act in very different ways: There is no value judgment to be made here. Simply a statement of empirical fact. Each advisor runs their own practice as they wish. Other than the pure raising of assets, a broker dealer has no common investment purpose or uniformity of thought.
One by-product of being part of a private wealth manager is the look and feel of intellectual upgrade and general functional – intellectual equality among existing members. Whether the Portfolio Manager holds his/her CIM or CFA makes no difference. Both equally get the wealth advisor to where he/she needs to go. He/She becomes a Portfolio Manager.
In the client facing world, a Portfolio Manager holding his CFA or CIM carry equal functional weight. One has no greater value than the other. For advisors yearning to become a Portfolio Manager in today’s world, it takes longer to obtain a driver’s license than it does a CIM (8-12 months).
Indeed, with a chronic shortage of Portfolio Managers with an insanely competitive demand for these individuals, the regulators have never made it so easy with the CIM designation as the clearest, quickest route to get there. It really is that simple!
For an advisor looking to be a part of a collective with common thoughts and beliefs, he/she may find a closer bond between like – minded individuals. As a result, they may feel a common purpose working towards a similar investment objective. This means that cooperation and collegiality are far more common in independent discretionary managers than they are in a traditional brokerage dealer.
In a club of like – minded members, these criteria are essential to both membership and growth.
Another big reason why advisors are particularly attracted to Investment Counselling firms, is for their investment management focus and the widely held perception that they are an asset manager first, rather than a sales & marketing oriented business.
One advantage is the opportunity to be a part of an intellectual club of like- minded thinkers who share similar thoughts – investment ideas and can jointly cooperate to add, change and improve the investment management part, or any other part of the business. The focus is on the group as a whole rather than just one advisor working alone.
Wealth managers often operate as a club where its participating, producing members get to share in the ongoing spoils of new client-assets coming in. So long as the said Portfolio Manager is a contributing member, he/she can expect to receive ongoing house referrals. This is the case with most wealth managers. It is a huge added benefit that helps grow the Portfolio Manager’s book of business. This simply does not occur in a regular broker dealer.
Finally, since investment counselling firms all run on an OSC platform by definition (versus the Brokerage-CIRO platform), there has been a long- standing prejudice and preference that investment counselling firms are considered true, pure money managers. The reason for this is simple: true IC firms cannot charge a spread on trading fees, whereas CIRO based brokerage/money managers can and do. Unlike CIRO money managers that earn a spread on trading fees, this further separate IC firms as being a pure discretionary platform that makes no commissions on any trading. While the investor client would not know the distinction, for an increasing number of discretionary advisors, it is becoming philosophically aligned with their own values.
This positions the IC firm as a purist money manager free from conflicts of interests. Ie, how can a PM be a discretionary manager when he/she charges trading fees like a traditional broker? The perception of this inherent ‘conflict’ is always there.
Many of the older, traditional wealth managers emanated from true investment managers and their growth originally derived from performance, word of mouth, reputation and referrals. This all stopped 15 years ago.
Due to the mechanization of research and analysis and the institution of model portfolios, an ever – increasing number of private wealth firms are well oiled sales & marketing machines, with strong emphasis on sales & business development. The majority of firms have created a division of labour. There is a clear functional separation between Sales & Client service e- oriented Portfolio Managers versus true Investment Management focused Portfolio Managers. Although they are intertwined and interdependent on each other, they carry an entirely different function.
To be clear, they both carry exactly the same registration as a Portfolio Manager-but they have very different functions. In either case, the advisor must be registered as an Portfolio Manager to carry out either function.
Recognizing that many individuals need meaningful participation-involvement in the investment management process: so long as the portfolio manager is a revenue contributing member of the club, an increasing number of private wealth firms are giving client facing PM’s the ability to participate in idea generation, stock selection asset class suggestions (within very firm guidelines). The caveat is the principle understanding that the final arbiter of all investment related decisions rest with the investment management committee and its CIO. Sometimes the investment committee is made up of client facing portfolio managers. But more often, it is made up of an entirely distinct group of investment professionals.
Philosophical disagreements are not common. The vast majority of client facing PM’s are already in full alignment with this process, otherwise they would not have signed up with the club in the first place. It is one of the principle reasons why they joined.
Further, from a client-investor perspective, the fact that many private wealth firms have cleverly evolved as more investment focused, ie, a ‘wealth management boutique’, ‘family office’ or multi ‘family office’, has allowed them to be far removed from the age – old perception of a simply being ‘sales chop shop’ but far more client – investor centric.
With more private wealth firms focusing on deep financial-tax planning, trust & estate, insurance and investment counselling; they have demonstrated the ability to offer an integrated wealth management solution with aligned purpose. This has become another attractive feature for many upcoming wealth advisors and their HNW clients. Very often, a firm already has individuals performing various specialized functions to serve as a central shared resource to portfolio managers. Indeed, the recent litany of bank proprietary conflicts and sales pressures on various divisions of the bank, all serve to paint the bank brokerages as massive sales machines with little regard for investors. This only further separates independent private wealth firms with their ability to show how far apart they are in structure and substance.
Again, the sheer growth of private wealth firms is further proof that increasing numbers of investors are resonating with independent firms as a better way. This also increases advisor confidence in his/her ability to move their clients to a preferred fiduciary. What resonates with investors is always in the advisor’s best interest.
Whether in a bank or independent firm: in the brokerage environment, an advisor is responsible for the entire litany of functional responsibilities. This includes sales, marketing, business development, administrative and some compliance work. For any advisor starting out or in the middle of building out his practice, it is an overwhelming task for the best individuals. And only when he/she reaches a revenue hurdle of around 750K will they get HALF an associate. The rest must be subsidized by the advisor themselves. This remains a burden many young advisors cannot overcome.
By contrast, most private wealth firms provide two significant advantages not offered for young-upcoming wealth advisors in the brokerage environment.
1.The investment management structure is run entirely separately and exclusively by professional investment managers responsible for research-analysis, stock selection and portfolio construction. This relieves the client – based Portfolio Manager of this significant responsibility.
2. All administration-operational support (and costs) are provided by the firm’s own staff. They are the shared resources available to all its portfolio managers
3. By not having principal involvement in constructing investment products portfolios nor involvement in administrative-compliance procedures, this relieves the advisor of a massive burden. This gives them time & space to invest in building his/her business. As a result, this substantially increases the odds of advisor success.(building a successful practice).
For advisors in traditional broker dealers, the leading cause of advisor failure is the distraction of managing the entire sales, marketing, investment function, administration and compliance responsibilities. It is simply overwhelming. It impedes their time and ability to do the important things that matter most. It robs them of the ability to exercise their natural skill in unlimited fashion.
For many years, the private wealth industry observed the systemic shortcomings in the brokerage environment, its failures and adapted: For the Portfolio Manager in a private wealth firm, it’s a major distraction removed. The odds of his success have increased many times over.
Where’s the proof that this structural separation works?
Very simple. Look at the 320 private wealth member firms that have already figured it out. They are the current and future source of industry growth. The numbers reflect the fact that the model works. And these are the firms that many discretionary advisors are now moving to. It embodies the old saying, ‘if you can’t beat em, join
em.”
Obviously, the answer depends on the individual firm. While some firms are very firm on their core philosophy with often blinding conviction – many independent private wealth boutiques also offer a significant measure of strategic and investment latitude to producing advisors. This means 2 things.
1) Depending on the advisor, the ability to have significant input in the investment structure (if the individual has substantial investment experience to warrant)
2) Significant authority to help steer, change and modify the strategic direction of the firm, if necessary, by general agreement. Normally, he would have to be a partner.
The size and nimble nature of private wealth boutiques allow for easier change in so many ways. This includes moving from a core manager structure to a multi – family office, multi asset class, alternative focus or an integrated wealth management offering. All these structures take considerable time to build out and perfect. But the decision to make strategic-structural changes are far easily done in contrast with large bureaucratic bank like organizations.
In sum, while members of the club originally come together because they hold a set of shared values and investment philosophies; this does not mean that individuals cannot make suggestions for change. Whether they be investment or strategic issues, most firms hold its members with equal regard. In this respect, it remains another major reason that drives advisors to smaller firms.
It should be made clear. There is a difference between being a club member and member of the Executive Committee: (normally reserved for partner-shareholders) It is no different from any other private club: a private wealth firm has a formal set of rules, policies and clear protocol for how it governs itself and business conduct.
Like any club membership rules, decisions must be made by majority or unanimous consensus of committee members. Obviously, like any other professional services business, the extent of a Portfolio Manager’s own involvement and influence, depends directly on the size of his economic contribution to the firm and whether he is a shareholder. The former usually results in the latter.
Private wealth firms have the fastest growth rate compared to their brokerage counterparts. While broker dealer firms have declined (in number of member firms), private wealth firms have enjoyed a 300% increase over the last 14 years. They are the fastest growth segment in the investment industry.
From an employee, client and investor perspective: Private Wealth managers have become the most sought – after businesses to work for and buy.
Private Wealth Managers are compelling to advisors for offering highly attractive, nimble compensation plans which include income stability, ongoing recurring revenues, and the high probability for ownership and real liquidity (for strong producers-performers) buy outs from a litany of external bidders.
HNW client-Investors have become increasingly attracted to private wealth shops for their independence, open architecture platforms and often product free biases. The sharp increase of many new private wealth firms is factual confirmation of where both advisors are moving to and the reason why clients are following them.
In the last 10 years, we have seen Institutional investors view the discretionary private wealth market as one of the most attractive long – term investments. And more private wealth firms are being sold at attractive prices. Whereas more broker dealers are simply merging to survive or closing shop. A private wealth firm doesn’t even need to reach 1B AUM to be sold. In the last 7-8 years, the industry has witnessed many firms at or under 1B, either sold in part or whole to an array of institutional investors. Given the sheer profitability and scalability of the discretionary business model, they are ripe to be sold to a Bank, Insurance Company Asset Manager, or any number of US-Canadian Private Equity firms. In sum, owner-partners have a plethora of choices.
Private Wealth firms offers so many attractive benefits: It makes ownership so very real and significantly meaningful to his clients and to the outside investor market. We have seen the historical success of many firms selling out at the right valuation, as opposed to bank dealers. Both ownership and financial liquidity in a growing private wealth firm become very real.
The number of historical transactions over the last 4 years alone have shown that, regardless of investment style, asset class, structure or size, the vast majority of investment firm type sold in the Canadian market – are discretionary wealth managers.
Private wealth firms have long become a favourite target market for many institutional investors. And the advisor’s incentive to join and help growth the overall business simply means that the multiples/EBIDTA only increase as AUM / revenues do. It is the increase in the valuations that become so compelling to producing advisors. The fact that private wealth firms are growing over their brokerage counterparts, simply means they have become the employer of choice for wealth advisors in the Canadian wealth management market.
For the wealth advisor contemplating his next career move, his future with the right private wealth firm never looked so bright.
As a general rule, most independent private wealth firms (discretionary) do not offer signing bonuses. They are not sufficiently capitalized for this. And firms have little to no interest in wealth advisors interested in up-front payments. They view this as a misalignment of philosophical and economic interests.
But firm owners can and will offer transition payments over the first 1-2 years to create a forgivable transition payment (expressed as a forgivable loan). More importantly, the assets-revenue the advisor brings to the firm will enable him / her to purchase equity in the new firm. There are various formulas for equity purchasing given the taxable considerations.
For many advisors, the combination of transition payments and equity shareholding make this compensation package a highly attractive buy in, over a traditional brokerage signing bonus. One is not necessarily better than the other. It is purely a subjective personal decision. The choice really depends on the individual advisor. In sum, they are simply two very different business models to attract advisors.
A word of caution to Wealth advisors at Broker Dealer firms.
Whether at a bank dealer or traditional brokerage firm, while signing bonuses are often a powerful compelling incentive to join a brokerage firm – It also comes with some very clear conditions attached. One must carefully heed the warnings and understand the consequences.
First, an advisor must have crystal clear conviction that his clients will follow him to his new dealer. That will form the basis of any up – front signing bonus.
Second, if the asset target/projection is not met within the said time frame, then the advisor does not receive the full value of his signing bonus. This is the risk he must carefully calculate.
Third, if he/she has not reached the agreed upon asset threshold of his conversion rate, this will greatly affect his ongoing grid payout once the time based ‘grid protection’ has expired. Typically, contract terms fall between 18-24 months. That means the advisor has 18-24 months to port his book over and receive any benefits associated with that transition. After the contract period has elapsed, other than his/her standard employment conditions-benefits, any financial terms associated with retention / bonus payments will have expired.
Finally, one major advantage with private investment counselling firms is the following: Since they do not offer traditional signing bonuses (only transition allowances), the advisor is not locked into any long- term forgivable loan. This greatly reduces the pressure he/she may feel coming to a firm with far more modest expectations. Nor is he finally penalized if the asset conversion is somewhat less than originally projected.
In the rare instance that the advisor does not work out, he/she does not have to repay any shortfall or difference as there was no upfront payment to the advisor. The terms of client-assets transition will depend on whether the advisor is either moving to a competing firm or retiring from the business.
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