HighTower says brokerage conflicts sustain exodus

Tue Feb 16, 2010 4:00pm EST

* CEO Weissbluth says exodus from big brokers to continue

* Sees HighTower assets soaring to $50 bln in next few yrs

* Firm added Smith Barney's Strata Group, $500 mln assets

By Joseph A. Giannone

NEW YORK, Feb 16 (Reuters) - Private wealth advisers, driven by concerns about conflicts of interest, will continue fleeing big brokerages even as the panic of the financial crisis fades.

One beneficiary is HighTower Advisors, a nascent Chicago company that has attracted top investment managers from big brokerages by employing an open business model that uses multiple banks to provide clients with trading, custody and research.

HighTower seals the deal by offering new investment managers equity stakes in HighTower, an approach that has helped propel client assets to $16 billion since its October 2008 launch.

"We're optimistic this growth will continue, especially in today's market where each of the big firms continue to do things catalytically that cause brokers to want to leave," HighTower Chief Executive Elliott Weissbluth told Reuters.

Earlier Tuesday, HighTower said it recruited an entire team of Morgan Stanley Smith Barney (MS.N) (C.N), advisers in Purchase, New York -- a stone's throw from Morgan Stanley's brokerage headquarters. The team of Smith Barney veterans, which does business as the Strata Group, manages $500 million of assets.

HighTower expects the trend to continue as advisers seek to break away from traditional firms, where the pressure to boost fees and generate business for other parts of the company can fuel conflicts of interest.

Last month, senior Morgan Stanley and Merrill Lynch executives played down the talk of a broker exodus and predicted the pace of movement would slow now that banks have recovered from the credit crisis. Weissbluth said the flight of brokers has a ways to go.

"We have no shortage in our pipeline of high quality advisers at all of the major firms that have basically had it. They're done with business as usual," Weissbluth said.

CONFLICT RESOLUTION

Weissbluth said worries about financial strength, though real, are not the primary motivation behind the movement.

"Just as many advisers said they wouldn't move during depths of the crisis. Some teams postponed their departures," he said. "It absolutely was a double-edged sword. We had some deals that were put on ice."

During its first 15 months in business, HighTower "lifted out" 10 teams of financial advisers from Merrill Lynch (BAC.N), UBS (UBSN.VX), Goldman Sachs (GS.N) and other firms. Beyond Strata Group, Weissbluth expects to complete two more lift-outs in the next month.

Within a couple of years, client assets could triple to $50 billion, he said. HighTower also expects to double its employees this year from about 100 people.

HighTower is one of several businesses established to acquire series of small, independent firms. The idea is to combine the advantages of high-touch practices with the benefits of big-company scale. National Financial Partners NFP.N, LPL Financial, Focus Financial and United Capital Financial have been pursuing a similar playbook for years.

Yet Weissbluth said his firm has a leg up on these rivals thanks to its "open source" business model and its ownership structure, which ensures financial advisers are on level footing with private investors.

HighTower extends ownership stakes to financial adviser teams that come on board. Investors own half of HighTower, employees have a 25 percent stake and financial advisers collectively control the rest.

Weissbluth said his firm goes beyond "open architecture," a business model that lets clients buy investments from any fund manager or provider. Weissbluth said his firm works with a number of clearing, trading and custody banks and also buys investment research from a number of Wall Street banks.

"You have Wall Street competing for your business, not a broker captive at a firm who is selling you what he has to sell you," he said.

A decade ago regulators cracked down on brokers selling in-house mutual funds to retail investors, concerned that many advisers were swayed by the fees they could earn and ignoring better options in the marketplace.

Likewise, he said, clients can be hurt when a stock or bond order is sent to the brokerage's in-house trading floor or if an adviser recommends investments in hedge funds, derivatives and other proprietary vehicles.

Despite its revolutionary notions, HighTower attracted investments from some of the biggest names in retail brokerage, including former Charles Schwab CEO David Pottruck and ex-Morgan Stanley Dean Witter chief Philip Purcell.

The young company, which down the road may go public to fuel its expansion, has also attracted investments from M.D. Sass, Australia's Macquarie Group (MQG.AX) and Credit Suisse's (CSGN.VX) Asset Management Finance unit.

"We feel strongly," Weissbluth said, "that HighTower is doing something very different. (Editing by Steve Orlofsky)

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