Reflections on Changes in the Wealth Management Sector in South Florida
I arrived in Miami from Europe about three years ago with my company Norman Alex which has wealth management recruitment as one of its main business practices. I was amazed by the differences in the market between Europe and South Florida or the US in general. In markets such as London or Geneva, senior private bankers have been leaving large structures for many years to join or set up their own independent wealth management companies. Some of these companies have become true multi-family offices managing ultra high net worth families and providing them with a holistic and client centric service including specialized financing, corporate finance, private equity and co-investments. Many have several billion dollars of assets under management although the smaller ones will have to consolidate to survive.
However in the US I found this strange phenomenon called the “broker dealer” which was never very prevalent in Europe but which has now all but disappeared. The broker dealers usually bring in clients from scratch (as do most private bankers now!), consider they have ownership of the clients and operate on revenue share rather than salary and bonus. Typically the revenue share is about 40-50% for larger firms with a strong brand and as much as 80-90% for certain pure platforms, although in the latter case there are often many deductions. This means that a broker dealer managing assets of $100m, which would be a small portfolio for a private banker, and generating revenue of $1m can easily earn $500.000. For this reason, financial advisors looking to maximize their revenue have traditionally looked to the broker dealer model in the US rather than the multi-family office.
Recently though this paradigm seems to be changing. New legislation is making the broker dealer model more transparent and I’m sure that this trend will continue. Furthermore Fintech companies are eating away the clients at the lower end of the market like termites feasting on a wooden Floridian house. The house is still standing for the moment but if nothing is done the edifice will gradually disintegrate over time. Young broker dealers are finding it increasingly difficult to develop significant portfolios and are being increasingly tempted by more technology based wealth management solutions which are perhaps also more “compliance friendly”, at least for the moment.
At the same time, private bankers are often becoming increasingly frustrated with their structures because of the burden of increased legislation, less time spent with clients, more restrictions on the clients they can deal with (especially on the international side) and compensation which is coming under downward pressure whilst also being increasingly discretionary and deferred. In the past, the automatic choice of such bankers would be to transfer to a broker dealer either within their own bank or externally. Today this reflex is becoming less common and the bankers like their broker counterparts are looking for alternative solutions.
Whether by design or coincidence, I have seen numerous multi-family offices setting up or looking to set up in South Florida in the last year. These companies usually take the form of a RIA and are based very much on the European model. Some have been engendered domestically but many are of Swiss origin either directly or indirectly. Whilst the Swiss seem to be afraid to establish a presence in the US as fully-fledged banks because of the enormous fines which have been imposed on them by the Department of Justice, they feel more comfortable with the more limited exposure of a RIA. They offer strong platforms built up over decades or sometimes centuries, holistic services often using carefully chosen external partners, a wide range of custodian banks and jurisdictions and above all a focus on the best interests of their clients. Furthermore their compensation is usually based on revenue share and equally attractive to that proposed in the broker dealer model.
Such structures are particularly appealing both to senior financial advisors and to sophisticated international clients. The competition from established banks and wirehouses will be brutal but their cost structure enables them to be profitable with a relatively small asset base. I personally believe that such organizations will gain significant market share at the higher end of the wealth management market but I would be delighted to receive your opinions and comments.