Big guns making inroads but it's not an easy task as winning trust is key to the holy grail.
Wall Street institutions, including The Goldman Sachs Group Inc., are chasing independent financial advisers and hybrid brokers with the ardor of a teenage boy at his first prom.
What those money managers and consultants need to remember is that many of those advisers, after cutting their teeth in broker training boot camps with Merrill Lynch, Morgan Stanley or what used to be Smith Barney, grew to dislike and distrust Wall Street vehemently and fled to a more agnostic and independent business model to escape the pressure of pushing products.
So while the Street has been intensifying its push into the independent adviser and broker-dealer marketplace over the past few years (indeed, Wall Street has no choice, since that is where more and more wealthy clients are moving their money) the problem — and it isn't insignificant — is winning advisers' trust.
“After the dealings I've had with major Wall Street firms — when they absolutely misrepresent what they were doing — I will never, ever trust them again to do what is in the best interest of clients,” said Ron Carson, whose firm, Carson Wealth Management Group, manages and oversees $3 billion in client assets. “We've all been burnt by the big houses, and now they want to come and partner with us?”
Biggest, boldest names
Even in the face of such skepticism, the budding relationship between Wall Street and the independent adviser market includes some of the biggest, boldest names in finance.
Private-equity giants KKR & Co. LP and The Blackstone Group LP are managing private-loan portfolios in nontraded business development companies sold by independent representatives and firms such as Ameriprise Financial Services Inc., LPL Financial LLC and other large independent broker-dealers. Blackstone is advising $2.5 billion in private-loan assets through one deal, the nontraded business development company FS Investment Corp.
Capital Integration Systems LLC, better known as CAIS Group, an exchange for alternative investments such as hedge funds and private-equity funds, launched an effort with Goldman Sachs this year to increase advisers' access to structured products. Goldman is making its structured products available to advisers through CAIS.
CAIS also is working with institutional consultant Mercer LLC, which has $6 trillion in client assets globally. It is vetting hedge funds and funds of funds on the CAIS platform.
The consulting firm's financial advisory unit, Mercer Investment Management Inc., in turn, is advising a new retail interval fund called the Total Income + Real Estate Fund. The fund is sponsored by Bluerock Real Estate LLC, a management company that has been raising money for a nontraded real estate investment trust.
Regardless of such inroads, it will be hard for Wall Street institutions broadly to win the trust of advisers.
“They will always have those conflicts and make money from investment banking,” Mr. Carson said.
“Can they really sit on the same side of table as a client?” he asked. “I don't know if they can do that and have those [banking] conflicts present.”
Adviser mistrust of Wall Street is not as deep as Mr. Carson describes it, according to one executive.
“That's not been our experience,” said James McNamara, president of Goldman Sachs Mutual Funds and global head of third-party distribution.
“We earn our trust every day with advisers,” he said, noting that Goldman offers strong investment products with a clear value proposition to advisers and their clients. “We're pretty excited about the growth trajectory in the RIA market,” he said.
Times have changed
Ten to 15 years ago, it would have been almost inconceivable for institutional money managers, private-equity funds and Wall Street investment banks to chase independent advisers. The real money was with defined-benefit pension funds and sovereign-wealth funds, not an independent registered rep with an office in Peoria, Ill.
That has changed.
One of the fastest-growing lines of business for Mercer in the United States is wealth management.
The company has doubled its number of clients in that area, which include independent broker-dealers and registered investment advisers such as HighTower Advisors LLC, said David Eisenberg, principal and segment leader for U.S. wealth management at Mercer.
In fact, over the past five years, Mercer has been quietly building its presence in the independent adviser marketplace.
“Our client is typically the home office, and we're consulting to the parent company of the adviser,” Mr. Eisenberg said. “The retail marketplace suffers from a lack of access to institutional managers and institutional quality research.”
A clear opportunity in the independent adviser market for Mercer, and others, arose from the higgledy-piggledy manner of analysis and due diligence of alternative investments such as real estate investment trusts and BDCs, Mr. Eisenberg said.
Due diligence of alternative investments for independent broker-dealers has long been controlled by a handful of analysts with long-standing relationships with both broker-dealers and product sponsors. And it has also been the norm for the product sponsors — not the broker-dealers — to pay for due-diligence research.
That practice, and all its potential for conflicts of interest, isn't how Mercer works, Mr. Eisenberg said.
“We don't get paid by the managers we are reviewing,” he said.
“We are paid by the clients. You are not going to be independent when you're being paid by the product sponsor,” Mr. Eisenberg said.
Indeed, even a critic of Wall Street practices such as Mr. Carson views the expanding arena of alternative investments as an area where the Street can add value for advisers.
CAIS, he noted, sounds a lot like Fortigent LLC, a leading wealth manager that LPL Financial, Mr. Carson's broker-dealer, acquired last year.
“That's where the action has to be, in the alternatives space,” he said.
