As Wells Fargo Sheds 130 Advisors, One FA Breaks Away to Avoid Wirehouse Homogenization
Last fall’s cross-selling scandal continues to engulf Wells Fargo Advisors. The bank’s retail brokerage unit reported 130 advisors left during its latest earnings call, marking a third straight quarter of headcount slippage.
Jim Denholm knows how such a saga and negative publicity can affect a practice. The Austin, Texas-based advisor, who worked at the wirehouse for a dozen years, left earlier this month to start his own independent RIA, IronBridge Private Wealth.
But the solo practitioner tells FA-IQ he didn’t break away due to the scandal. “While it was disturbing, I was in the private-client channel,” he says. “Working with affluent investors on that side of the business, I wasn’t impacted all that much.”
Clients did ask what was going on, Denholm recalls. “But after 16 years in the industry,” he says, “I was fortunate enough to have built a strong level of trust with my clients. I didn’t lose anyone because of the scandal.”
Still, Denholm admits to developing, over the course of several years, an itch to look at other business models. By early 2016, he says, a growing body of research led him to set his sights on going independent.
“Well before any signs of a scandal started to appear I had already become convinced that breaking away would be the best way to serve the long-term interests of my clients,” says Denholm, who started his career at Morgan Stanley and managed more than $200 million at Wells Fargo.
Late last week, FA-IQ caught up with Denholm, who was busy onboarding clients and processing paperwork with the back-office support of Raymond James’ affiliated network group.
Q: What was the main reason for your move?
A: Over the years I’ve been finding fewer and fewer differences between practicing at Wells Fargo and other large brokerages. Everyone in this channel seems to be playing in a highly homogenized and commoditized space. The only major difference I see left these days comes down to how you’re compensated.
Q: How so?
A: As a $1 million-plus annual revenue producer I might expect to be able to get $2 million in upfront money and another $1 million or so in deferred bonuses to move to another large brokerage. But I didn’t want to make a decision about a move based on my own compensation outlook. So I decided to pass up a potentially large signing bonus to go independent and take complete control over my own business. I even walked away from deferred comp at Wells Fargo and paid back several hundreds of thousands of dollars in forgivable loans still on the books.
Q: Was technology a consideration in your decision?
A: Yes. Technology is evolving so rapidly that large firms are having trouble keeping pace. We wanted more flexibility in terms of choosing cutting edge systems and keeping abreast of new developments. At our new firm, we’ve been able to offer clients a much improved interface for accessing information about their accounts. We’re also in the process of upgrading our portfolio analysis software by evaluating systems from TradeStation, Orion, Black Diamond and several others. In terms of CRM, we’ve decided to use a suite by Redtail, which is much more efficient for our practice than what we’ve had in the past.
Q: How do you see service models changing?
A: Since the financial crisis in 2008, we’ve started to sense a growing distrust by high net worth investors in working with large financial firms. I think more people are growing tired of traditional fee structures. So this new RIA is taking a rather innovative approach – one that we think is relatively unique in trying to confront these types of issues.
Q: You’re tying fees more closely to performance, aren’t you?
A: That’s correct. We’re charging for our services using a “success” fee that’s tied directly to an individual’s financial plan. For example, say we determine a family needs to generate 6% per year to meet their long-term goals. If their portfolio exceeds that target, then we’ll earn a small fee that should equate to around 10% of those profits. On the other side of the equation, if their portfolio is down more than 6%, then we’ll reduce our fees by 20% for the following year.
Q: Do you have another set of fees?
A: Yes. Besides annual success fees, for our higher net worth clients – usually those with portfolios of $5 million or more – we also charge on a monthly basis. Again, clients only pay if their portfolios exceed a monthly performance hurdle that’s predetermined as part of an ongoing financial planning process. The highest fee for these clients on a monthly basis is going to be around 0.15%.
Q: This sounds a little like what hedge funds charge.
A: Yes, it’s a variation on the 2% of assets and 20% of profits model. But this is a much more low-cost adaptation. If we’re doing well by our clients I’d expect their total fees to be around 1% in a typical year. The idea is to help clients get around any sense of distrust of traditional wealth managers who set fees regardless of how their portfolios are performing at any given time.
Q: The risk to your firm is underperforming for an extended period, isn’t it?
A: Yes. And that’s why we’ve developed proprietary investment strategies to address those drawdown risks. Our portfolios start with core allocations based on individual risk profiles. But along with my staff, I’ve also developed a quantitative model that serves as a tactical overlay to stay in front of major changes in market cycles.
Q: Were you able to do this at the wirehouses?
A: Not really. We’ve done a lot of back-testing, though. I’m satisfied that our models will prove effective. After all, we’re aligning this firm’s compensation structure directly to how well our client portfolios perform. So we’re all in this investment planning business together – if they do well, so will we.