As the wealth management sector has evolved since the jolting near economic meltdown of 2008-09, a Louisville company that provides back office support services to independent brokers is thriving. Private Client Services is a broker-dealer and registered investment advisory (RIA) firm now closing trades, providing compliance and other services to around 50 independent financial advisor branches across the nation from Seattle to Boston.
It’s a specialty niche, but one that is growing as more of the individual advisors at the nation’s 3,500-plus wealth management firms opt to leave the large “wire houses” that operate nationally to be their own boss and keep much more of the revenue they generate, said Ernest Sampson, founder and CEO.
An employee agent for a national brand “wire house” firm such as Morgan Stanley, Wells Fargo, Bank of America or Merrill Lynch typically will retain about 40 percent of the gross revenue they generate in providing wealth management advice and service. The other 60 percent goes to the firm for whom they work, he said.
“An (independent) individual advisor on average will keep 85 percent,” Sampson said. “That is the big motivation to get a bigger share of the gross revenue.”
The “wire house” firms have to fan their 60 percent split of revenues out across a lot of expense lines. Overhead includes not only physical office space and associated costs from IT to utilities but also complex back-office operations to execute trading, keep detailed individual records and conduct compliance operations for multiple federal and sometimes state regulatory agencies – for their dozens or hundreds of locations.
Independent firms are usually one office and often one individual financial agent. Many are niche operators to some degree – they do not attempt or want to offer every financial product that exists, especially not the complex exotic products.
Founded in 2001, Private Client Services is a registered investment advisor with the federal Securities and Exchange Commission, whose regulatory functions are conducted by the Financial Services Regulatory Authority. It is a business to business broker dealer and RIA that works with independent hybrid financial advisor groups.
One of the latest to join the Private
Client Services brokerage platform, announced March 1, is The Russell Group wealth management firm, which is part of Atlas Brown Family Wealth Management of Louisville. Others are literally all across the nation. Testimonials on the PCS website are from Crystal Wealth Management of New York City, Private Client Wealth Advisors of Denver, and Blue Ocean Global Wealth in Rockville, Md.
The largest firm with PCS has about 20 representatives, while the average is three to five, said Steve Higdon, chief development officer.
Large-firm tools for independents
The platform includes the tools, technology and research to operate within a range from lone practitioner to multi-office group. PCS has no proprietary products such as specific funds or annuities – an imperative to push proprietary products often motivates agents to leave the wire houses, according to Sampson and Higdon. PCS does see to it that client partners maintain their continuing education, various state-mandated insurance courses, professional credentials, tax law changes and market trends. It also secures data systems.
“The safeguarding of data is one of the most important things we do every day,” Higdon said.
Meanwhile, an emphasis on ethical purity has been a key PCS business strategy, according to Sampson. Fewer than half the advisors who contact PCS about joining its platform are eventually accepted and registered, he said.
If a potential client has an allegation of fraud, bankruptcy, a compromised debt, has ever forged a signature, been accused of lying about the prospects of a product, churned an account or has other such “dings” on their record, PCS rejects their business.
“He or she can taint the firm and blow us up,” Sampson said. “We have historically turned people away. We turn away far more than we accept. There is a cleansing that has been going on in the industry for a number of years.”
Especially since the 2008 financial panic – made possible by widespread disregard for compliance standards in writing mortgage loans during the housing boom – even a slight ethical impropriety can sully the reputation not just of an individual but their firm and parties to its business dealings.
More Kentuckians vetting advisors
Kentucky financial regulatory officials do get more inquiries from the public today than in the past.
“We have seen an increase in that,” said Shonita Bossier, director of the Securities Division within the Kentucky Department of Financial Institutions. “You have the public definitely taking more of an active role in vetting any financial service provider, which is great.”
The Securities Division promotes outreach to investors and conducts investor education programs.
“The resounding thing is: Check out your financial service provider,” Bossier said.
Kentuckians or those using a broker-dealer in the state can inquire online at kfi.ky.gov or call (800) 223-2579 to confirm that they are registered to do business in the commonwealth and details of any regulatory action in which they’ve been involved, she said.
There is a heightened sensitivity toward operations since 2008, said Don Mullineaux, emeritus professor of economics with the University of Kentucky Gatton College of Business and Economics.
A lower cost of entry into the business is helping encourage the trend of brokers leaving large “wire house” firms to launch their own wealth management advisory operation. His own wealth manager, who oversees Mullineaux’s retirement funds, “did exactly that. It’s very common.”
A former faculty colleague also entered the wealth management business, he said.
Schools also have become more strict in their screening of potential faculty, said University of Louisville finance professor David Dubofsky.
“Money management is one of the most highly regulated industries in the country,” Dubofsky said, and appropriately so. “It’s so easy to be a charlatan, and the whole industry is tainted by these con men and women.”
Private Client Services has reached its current size, approaching 50 branches on its platform, by guarding its reputation.
It receives referrals from the national custodian firms that hold investment funds for registered investment advisors: Fidelity Institutional Wealth Services; Schwab Advisor Services; TD Ameritrade Institutional; and Pershing, Advisor Solutions, which is part of The Bank Of New York Mellon.
Higdon calls the company one of Louisville’s best kept secrets and believes it is positioned especially well to grow.
“We have the opportunity to grow very big,” Higdon said.