The ups and downs of going independent

If Charles Massimo had it to do all over again, he still would choose to leave Smith Barney and become an independent broker. But his transition — from managing $80 million with a partner at a Manhattan branch of the New York-based wirehouse to flying solo as CJM Fiscal Management Inc. — is both a cautionary tale and one that might inspire other brokers to make the leap.
The story has a happy ending because Mr. Massimo today manages $75 million, held largely in index funds, in a way that he believes finally allows him to put his clients' interests first and still do well himself. But he also bears the scars from the metaphoric land mines, visible and hidden, that lay in his path. Booby trap No. 1: Before Mr. Massimo had even cleared out his desk in August 2002, his partner, with whom he was planning to defect, decided to stay put at Smith Barney. "It was a very low moment," he said. "We had left Merrill together in 1998 for Smith Barney, and our families socialized." The last-minute decision savaged Mr. Massimo's finances; his former partner was able to keep most of the $80 million of client assets, leaving him with about $5 million. "It wasn't cordial," Mr. Massimo said. "We had told clients we were moving together." Booby trap No. 2: The business climate — just months after 9/11 and still in a post-tech-bubble malaise — was not buoyant. The sudden drop in Mr. Massimo's income and the uncertainty about his future earnings were exacerbated by family problems. Two of his 5-year-old triplets are autistic, and his wife had her hands full at home taking care of them. "What the heck did I just do?" Mr. Massimo recalls asking himself. Indeed, he wondered if all his past efforts had been for naught. Starting as a compliance officer at Shearson Lehman Brothers in New York in 1984, Mr. Massimo moved to New York Life Insurance and Annuity Corp. in 1988 and then to New York-based Merrill Lynch & Co. Inc., where he completed the rigorous broker-training program in 1995. He said the training proved to be a mixed blessing. "The Merrill Lynch program didn't teach me how to build a portfolio; it taught me how to sell product. Every day, we'd listen to a squawk box and hit the phones — that's how we got paid," Mr. Massimo said. "It was always about quantity of clients, not quality. They don't tell you how to build a sustainable business." Erik Hendrickson, a spokesman for Merrill Lynch, defended the training program. "We have what we believe is the most robust training program in the industry," he said. But the less-than-robust stock market of 2001 and 2002 revealed how little a sales-oriented approach served clients' interests, and it made Mr. Massimo evaluate his future. Although he describes his branch manager as "very fair," he said that as the market deteriorated, he became "disgusted by the lack of guidance that Smith Barney was providing to us for our clients." Alex Samuelson, a spokesman for the New York-based unit of Citigroup Inc., declined to comment. Out on his own, Mr. Massimo struggled to find clients and a better way to serve them. He said that in 2002 and 2003, he drained his savings and worked from a share-a-receptionist office suite. "My income wasn't nearly enough to support a family of five," Mr. Massimo recalled. But the turning point came just as things looked most bleak, when he came upon "Intelligent Asset Allocation" by William Bernstein (McGraw-Hill, 2001). The book led Mr. Massimo to Dimensional Fund Advisors Inc. of Santa Monica, Calif. "I begged and pleaded [with the company], and they allowed me to become a DFA adviser," he said. One hurdle was that DFA does business predominantly with fee-only registered investment advisers who keep assets with a custodian. Although 90% of his business is fee-based, Mr. Massimo continues as a registered representative, clearing through a small Rockville, Md.-based broker-dealer, H. Beck Inc., so that he can sell life insurance and annuities for estate-planning and retirement income purposes. He satisfied DFA's demands by outsourcing his trading, re-balancing and reporting to a turnkey asset manager, Loring Ward International Ltd. of New York. Armed with this platform, Mr. Massimo saw a clear path to building a practice that fit his vision. "My mission became going out and telling everyone everything I know about DFA," he said. "I did this by giving seminars." "I have confidence in what I do to go up against [The] Goldman Sachs [Group Inc.] or [The] Bear Stearns [Cos. Inc., both of New York]," Mr. Massimo added. "At Smith Barney or Merrill Lynch, I never had the confidence, because we were just [offering] a commodity. Now we're offering an investment discipline that has proven to be one of the most prudent ways for investors to grow and preserve their wealth." Mr. Massimo also tries to compete against Wall Street's brass, glass and wood-panel atmosphere by working from an office that features muted tones, colorful Impressionist-style paintings and modern furniture. "You get a warm feeling. The office appeals to old money as well as new money," Mr. Massimo said. He is now looking to hire five financial advisers from wirehouses who are interested in following a path similar to his. To this day, Mr. Massimo and his former partner have not spoken, but his bitterness is muted. "My wife believed in me," he said. "But I don't think my partner had the support of his wife." Brooke Southall can be reached at bsouthall@crain.com.