business

Kevin O'Connor finds himself in the vanguard of big changes in Minnesota's financial services industry.

Independent financial advisers like him are joining forces to make their operations more efficient, creating new networks that compete with old-line investment houses, including those tainted by Wall Street excesses.

Some money managers also are fleeing large brokerages. By affiliating with the new financial-planning groups, these experienced advisers gain independence without needing to manage every detail of their business, such as finance, accounting and compliance.

O'Connor, a 58-year-old certified public accountant from Plymouth who founded Trusted Financial Partners in 1998, affiliated with Adam Smith Family Cos., a division of the Minneapolis-based investment banking firm Cherry Tree. It's among the new breed of financial services organizations expanding in the state.

"We think we are very well positioned to pick up unhappy clients and advisers who are sick of the 'old Wall Street' way of doing business and are looking for a new, clean, transparent, fee-only way of investing and wealth management," Keith Tufte, chief investment officer for Adam Smith, said in an e-mail. "Our goal is to grow quite dramatically."

Tufte said the rout on Wall Street and headlines about executive bonuses have made investors nervous. Some are turning to independent Registered Investment Advisers, or RIAs, who have a fiduciary responsibility to their clients. Cherry Tree and other RIAs charge a fee for advice.

Brokers, by contrast, are only obliged to sell clients products appropriate to their risk tolerance, but not necessarily what they believe is the best product for their clients. And because they can get fees and commissions, brokers sometimes are criticized for churning clients' accounts to reap transaction fees, or pushing products that include premiums for themselves.

'Liberated' to serve clients

O'Connor said when he signed on with Adam Smith, he felt "liberated from the parts of the business that I didn't really like" because the company handles administrative work such as regulatory compliance. "[Y]ou've got to get it done right, but it's not nearly as much fun as talking to your customers," said O'Connor, who has a son and a daughter working with him.

Wealth Enhancement Group, based in Plymouth, is another firm seeking to grow. Roger Arnold, senior vice president and chief distribution officer, said the company maintains quality by recruiting advisers who fit the company's client-focused model and by training them to work as a team.

Arnold said the company has about 40 advisers, including associates, a number that's been relatively flat in recent years. He said the firm now hopes to expand in Iowa, the Dakotas and possibly western Wisconsin, but it's in no hurry. "We definitely have growth needs and wants but it's the right growth for the right reasons," Arnold said. "Our model fits well on Main Street USA."

Some of the other Minnesota firms expanding in the financial services industry are Marquette Asset Management in Minneapolis and Focus Financial Network in Roseville. Often, they expand by netting advisers from other firms, large and small.

Bing Waldert, director at the Boston-based financial services research firm Cerulli Associates, said about 310,000 advisers operate nationwide. About 1 percent go independent each year, he said.

Technology allows advisers with a laptop and an Internet connection to set up shop, but not everyone is comfortable working alone. He said firms like Cherry Tree offer advisers a degree of independence along with business support.

Alois Pirker, research director for Aite Group, another Boston-based industry research firm, said smaller firms have a "window of opportunity" to recruit talent from the major brokerages, which are still emerging from of a series of mergers and other tumults related to the Great Recession. He said the large firms have done a good job of hanging on to their top advisers and by extension, their clients.

When advisers move from large to smaller firms, Pirker said, they typically bring about two-thirds of their client book with them. He said although the trend of advisers networking together in smaller, independent operations is real, it remains to be seen how far it can go. If personal service and independence are the selling points, Pirker said, what happens when these firms grow into larger players?

Push-back at big firms

The exodus of advisers from the nation's four major brokerage firms may be slowing.

Major brokerages like Morgan Stanley Smith Barney, Wells Fargo Advisors, Bank of America-Merrill Lynch and UBS have paid top brokers bonuses of 130 to 330 percent of their previous year's earnings to retain them, according to reports in trade industry publications. These firms also offer large "forgivable loans" to lure the top brokers away from competitors.

Minneapolis-based Ameriprise Financial Inc., the fourth-largest broker-dealer in the country, is recruiting top talent to join its stable of about 10,000 advisers nationwide. Ameriprise has broken with its tradition of grooming most of its advisers from scratch. Some weaker performers are now being replaced with more experienced advisers hired from other firms. It also has a franchise operation that gives entrepreneurial advisers more independence with some support.

Jim Cracchiolo, chairman and CEO of Ameriprise, said in a recent conference call with analysts that the company went through a "pretty major transformation" last year merging operations with H&R Block and recruiting more experienced advisers. He said the expected "paybacks" on the veteran advisers will take two to three years to amortize, but they are already producing more than many of advisers who left the company.

Manish Dave, vice president and senior director of business development at Ameriprise Financial, declined to characterize the firm's recruiting bonuses or say how many advisers the company plans to hire this year. But he said, "We do plan an aggressive growth year for 2010."

The idea of independent advisers joining forces makes sense, Dave said. Many Ameriprise advisers like the idea of partnering with incoming advisers from other firms, sharing ideas about best practices and learning from each other, he said. Franchisees appreciate the depth of knowledge they can draw on as well as the power of the Ameriprise brand, marketing initiatives and trading platform.

Dave said the independent adviser industry remains fragmented, though, and he predicted that it will be hard for smaller firms to differentiate themselves. "I think those firms with financial strength and resources will have a competition advantage," he said.

Double digit growth

John Beuerlein, chairman and chief investment officer of Marquette Asset Management, works in a a shop with just five people on its investment team, four focused on client services and three dedicated to sales and marketing. He said the firm is hitting on all cylinders despite -- or perhaps partly because of -- the financial crisis.

"We're able to deliver a different type of product to the clients, more of a personal touch than some of the national firms that are around," Beuerlein said. In the wake of the financial crisis, he said, "people want to have their hands held a little bit more; they want to be able to speak firsthand to the people that are running their money. We find ourselves on the beneficiary side of that."

Beuerlein said the five-year-old firm has had double-digit growth every year and now has $800 million in assets under management. The firm plans to continue that trajectory and is in discussions to bring aboard more advisers, he said. "We're always looking for opportunities to expand our footprint."

Focus Financial has 115 advisers in 36 states, predominantly in the Upper Midwest. "I think the way this year is starting we could very well increase our adviser base by 20 to 30 percent," said John Bina, president.

While some firms offer independents cash or stock for a portion of their business, Bina said, "In our group, you own your business ... and we provide support."

Some firms foresee growing through mergers and acquisitions and then taking their business public or selling to investors looking for an income stream, Bina said. But the trend toward independent advisers making alliances and forming networks is in its infancy and no one knows whether that will work. "I don't know that we've seen the full cycle of this," he said.

Dan Browning • 612-673-4493