As climate improves, advisers eye expansion

Emboldened by stronger balance sheets, many financial advisers are considering plans to expand their practices by opening a second office. Currently, about 25% of firms with $100 million or more in assets operate a second office — a figure that's been frozen in place since the start of the stock market's collapse and the ensuing economic downturn a couple of years ago, according to Mark Tibergien, managing director and chief executive of Pershing Advisor Solutions LLC. But as more advisers shift their focus from cutting costs to gathering assets, experts said the number of firms opening second offices will likely rise. That shift is already well under way. Eighty-six percent of 200 advisers surveyed last month by Fidelity Investments said their primary goal is to expand their businesses, up from 63% a year ago.

FUELED BY GROWTH

“We're going to see a lot of accelerated growth from advisers, which will mean second offices in other markets,” said Michael Kim, executive vice president of practice management for Fidelity. The case for opening a second office can be compelling. It can provide a way to gain entrée into an underserved market. It can also help better serve clients who are far from an existing office. And some firms open a second office to accommodate high-producing advisers who, for whatever reason, can't work out of the main office. No matter what the reason, deciding whether to open a second office usually comes down to one thing: money. A successful second office can increase a firm's revenue by 50% within three years, Mr. Tibergien said. “Having a second office is a great idea,” he added. “You can build a second office that is equal to, or even greater than, your current location,” in terms of assets and revenue. That said, the decision to open a second office should not be made lightly. About 25% of all second offices fail, said Steven Levitt, managing director and co-founder of Park Sutton Advisors LLC, a boutique investment banking firm that specializes in the asset and wealth management sector. Typically, those offices fail because they do not attract enough new business, he said. A good rule of thumb in deciding how much money to allocate for the opening of a second office is to limit spending to no more than 20% of the office's projected annual revenue, Mr. Levitt said. “A small-business owner needs to think very carefully about opening a second office,” he said. Indeed, the tab for getting a second office up and running can easily run into hundreds of thousands of dollars — if not a lot more. For example, when The Trust Company of the South decided in 2003 to branch out from its flagship office in Burlington, S.C., to a second location in Raleigh, N.C., it shelled out about $200,000 — the bulk of which was spent on staffing. New York-based Sontag Advisory LLC, which oversees $3 billion in assets, spent about $1 million on staffing, technology and leasing costs to open a second office in Westport, Conn., in 2005. “You hope, as you're making the commitment, you're seeing the rewards,” said Howard Sontag, the firm's founder and principal. Second offices also present certain logistical challenges, namely making sure the staffs in both offices are united in their approach to dealing with clients and one another. Consequently, staff turn-over tends to be higher in second offices than in primary ones, say experts. To avoid such snags, prior to opening in Westport Mr. Sontag had the adviser he hired to run that office, Michael Delgass, spend six weeks working at the New York office. At the end of that time, “I knew my colleagues had my back and were going to wait 18 months for me to get on my feet to show that it was a growing proposition,” Mr. Delgass said.

FAMILIAR FACE

In fact, the office in Westport broke even during its second year and now employs a staff of four who oversee about $800 million in assets. The Trust Company of the South, which oversees $1 billion in assets, is also happy with its decision to open a second office. To head that operation, the company hired adviser Michael H. Palmer, a familiar face in the Raleigh wealth management circles. Mr. Palmer brought with him more than $15 million in assets — allowing the office to break even within its first year. Today, that office is responsible for about $200 million of the firm's assets, said Mr. Palmer, a principal of the firm. Hiring an adviser who was familiar with the local market also proved beneficial for Albuquerque, N.M.-based Portfolio LLC, which opened a second office last fall in Oklahoma City. Six months after the firm hired Tracy Ann Miller, its assets had climbed to $115 million, from $60 million. “She helped us double our revenues,” Lee Munson, the firm's chief investment officer, said of Ms. Miller, who brought along a $50 million book of business. “I knew she was a winner. She was a person I was honored to have on the staff.” E-mail Lisa Shidler at lshidler@investmentnews.com.