Chicago Brokerage Builds Fee-Based Platform

FUNDfire, January 28, 2008

By Tom Stabile

A Chicago brokerage firm is taking the plunge into the fee-based product world by building a new managed asset platform with both traditional and alternative investment products. The move will expand the reach of a new advisory player in the crowded Chicago wealth market.

Chicago Investment Group, a privately held firm that bills itself as an investment management boutique, is taking its existing transactional brokerage and private equity fundraising business model and adding fee-based platforms that will include turnkey asset management provider platforms for separately managed accounts (SMAs) and mutual funds. It also will run a wealth management fee-based model.

The firm brought on William Hayes in November to fill the newly created director of asset management post, in which he has led the effort to build the advisory arm, including registering as an investment advisor with the Securities and Exchange Commission and vetting turnkey platform providers. Hayes came over from a senior v.p. post at Wachovia, where he was a financial advisor.

Chicago Investment also named Robert Acri as its new president earlier this month. Acri says his experience will help him to guide the fee-based platform launch and build a firm that offers a full range of wealth management, brokerage, investment banking, private equity, and real estate services. Acri had most recently served as president of Kenilworth Asset Management, a registered investment advisor (RIA) in Kenilworth, Ill., and had previously worked in the high-net-worth business at Chicago-based Northern Trust.

With its team in place, Chicago Investment Group’s SMA and mutual fund platforms could be up and running within the next 30 days, Hayes says.

“We’re looking to expand the capabilities of the firm,” Hayes adds. “The world of wealth management is going away from the transactional broker we knew 20 years ago. If you don’t have a managed money platform, you’re not going to compete.”

The firm’s fee-based move lags behind other regional brokerages that made similar efforts in 2003 and 2004, says Philip Palaveev, a senior manager at Seattle-based Moss Adams, a consultancy with a financial advisory practice. Today, the fee-based business makes up nearly a quarter of revenues for the typical independent broker-dealer firm, with about 10% of that on turnkey product platforms, he says. The average independent broker-dealer had about $4.1 billion in fee-based assets under management at the end of 2006, a total that grew rapidly from $1.3 billion in 2004, he adds.

Acri says he believes Chicago Investment’s platform will allow it to attract new financial advisors, gather more client assets, and increase distribution of private transactions. The firm is investing $5 million for systems, personnel, and implementation of the new platform.

Acri says the firm’s goal is to add 20 new advisors a year who produce at least $500,000 in revenue, with an eventual target of 120 advisors, up from the current 75. He declines to provide an assets-under-management figure for the firm.

Adding advisors will not be an easy bid, however, because the Chicago market is already brimming with wealth management competitors, says Alvin Spector, a partner at Lantern Partners, an executive search firm in Chicago. He says most of the big Wall Street firms have a presence, joining various Midwest regional firms and local Chicago players.

“You’ve got an over-served wealth management market,” he adds. “You won’t find anyone in Chicago who will disagree with that. To hire in a very crowded marketplace, it’s important to make clear how they intend to differentiate themselves. From a recruiter’s standpoint, it will be interesting to see what kind of package they put together to attract the talent and if there is any spillover effect on other employers.”

Chicago Investment will focus on investors with more than $1 million in investable assets, partly because the firm tries to leverage its private equity deals by offering access to its clients, Hayes says. In some cases, it will allow its investor clients to take a small stake as part of pooled investments in the private equity deals. The firm focuses on assembling early-stage private equity investments for companies that already have products in the marketplace and that are trying to expand.

The firm could still encounter some of the challenges that building a fee-based platform posed for other brokerages that made the leap, Palaveev says. Those hurdles include the task of equipping advisors to explain the new fee-based structure to their investors, providing adequate support for new operations systems, and smoothly managing the new compensation model for brokers.

“There are lots of issues to incorporate, but it’s a positive change,” he adds. “And one advantage of doing it now is that they can look at all of the mistakes that others made and avoid them.”