Luminous Deal Is Game Changer in Wealth Mgmt

Re-published ‘The Wall Street Times’ 18 October 2018. Originally published 15 Nov 2012 in ‘Fundfire’.

Jeffrey Bischoff is the president of Old Greenwich Consultants, a boutique executive search firm focused on the private wealth management industry. Previously he served as senior v.p. and national recruiting officer at Smith Barney, as well as executive director and head of recruiting at UBS’s private wealth management division.

Two weeks ago, three former Goldman Sachs advisors sold their four-year-old Century City, Calif.-based registered investment advisory (RIA) firm for a rumored $125 million – all in cash.

The First Republic Bank/Luminous Capital transaction is garnering all sorts of lofty superlatives, but “unprecedented” is not one of them. There is a precedent with striking similarities to the Luminous deal. However, the different environment for wealth management today means that the impact of the recent acquisition will be much greater. I think 2012 will go down as the break-out year for the “breakaway broker” movement, with more wirehouse advisors taking the plunge and going independent.

In 2001, State Street’s investment management group, SSgA, paid $217 million – half in cash, half in stock – for 75% of an almost five-year-old Century City-based RIA named Bel Air Investment Advisors. Bel Air, like Luminous, was founded by three former Goldman colleagues. What makes it even more uncanny is that all six of them – the cofounders of Bel Air and the three Goldman alumni at Luminous – were at one point all colleagues inside Goldman’s Century City office.

The Bel Air partners turned their backs on huge short-term gains by going independent rather than joining Morgan Stanley or Merrill (as the future founders of Luminous did), only to reap a substantial windfall less than five years later. The Luminous partners took a detour through Merrill Lynch on their way from Goldman to independence to the recently announced sale. The end results are remarkably similar.

Will the First Republic deal usher in a new era of big teams striking out on their own? In my view, yes, absolutely. But if so, why didn’t the Bel Air deal already do that?

Despite the eye-popping price tag, Bel Air’s ascension and acquisition did not start a wave. It was more of an interesting phenomenon to chat about than anything else. After all, how could anything like that ever be relevant to the “regular” multi-million-dollar advisor team?

But things started to change after the rise of the dot-com millionaires and the investment bankers serving them, as well as favorable tax cuts for the wealthy in the early 2000s. HighTower, Focus and Dynasty have all since been built to capture the money-in-motion. They are doing just that: collectively managing or servicing tens of billions of dollars in assets, with growth trends that have to be alarming to the folks running the big-four wirehouses.

Now there is the viable option of independence for the multi-million-dollar wirehouse teams that want to go private, instead of joining an industry rival. And the Luminous deal just sent a bolt of lightning into the mega-teams.

Advisors doing $15 million in revenue with $3 billion in assets (and are working for a huge firm, paid on a grid) are looking at the Luminous deal and doing the math.

Bel Air was dismissed as a curious aberration, a one-off, high-risk endeavor made by managing director-level Goldman alumni. And since no other deals of that magnitude have hit the tape since 2001, people forgot about it. Further, the fact that the deal unraveled and Bel Air’s partners ended up buying themselves back from SSgA at a significant loss for State Street made it even more of an aberration.

Yet, the Luminous deal is different. It is the deal that every top advisor team is talking about coast to coast. It illustrates a path to follow, complete with a timeline. It marks to market what an RIA with reportedly $5.5 billion in assets can command in the marketplace. It proves that a collection of former wirehouse advisors with an iron-tight business plan and superb new-business skills can ring the bell and land an eye-popping deal to be acquired. This is big news. Welcome to the “After Luminous” era.