ANALYSIS: HighTower’s Loss of $2.4 Billion Megateam Casts Long Shadow
When Paul Pagnato and David Karp walked away from HighTower Advisors with about 10% of its advisory assets last month, the Chicago-based firm billed it as a sign of success in helping brokers transform themselves to true independent advisors.
To many industry observers, however, it was a rebuff to the acclaim HighTower won in 2011 when Pagnato and Karp left Merrill Lynch after 19 years to join the upstart firm with some $1 billion of client assets. Even more damaging, it appears a repudiation of the “roll-up” business model that says umbrella advisory companies are worth more than the sum of its affiliates’ individual practices.
In an interview with AdvisorHub, Pagnato said he and Karp had indeed prospered at HighTower, building their team over almost five years to more than 20 and their client assets to $2.5 billion.
But the Reston, Virginia-based duo also is leaving behind equity in HighTower that Pagnato said is worth millions of dollars, a decision that signals a failure by the firm to deliver on promises that affiliates will be able to quickly monetize their stakes through a sale, public offering or some other relatively quick “exit” strategy.
“HighTower is in a similar position as the others [that] use equity to lure advisors away from the wirehouses or from the big independent side,” said Alois Pirker, a research director in Aite Group’s wealth management practice. “If growth is not there or it doesn’t happen in time, then maybe people make a different decision.”
HighTower, to be sure, is doing its best to frame the loss of as a win. It continues with over 150 advisors and has not experienced another departure of a major team since Margaret Towle left with around $1 billion of client assets in 2013. It also offers independent advisors and brokers an option to lease services without affiliating as equity-owning partners.
“When a team makes the shift to independence supported by the HighTower platform, it is a reflection of both parties’ success,” Michael Parker, the firm’s chief development officer proclaimed in a press release on May 31. A spokeswoman for the firm was not able to provide additional comment by deadline.
Pagnato’s reponse? “We’re completely independent and HighTower is just a vendor to us,” he said in an interview.
He would not comment directly on the equity his team is forsaking, but said pressures on HighTower and competitors from their private-equity backers to manufacture profits and to pay down debt have distracted managers from providing the optimal experience in cooperative marketing, purchasing and servicing that they promised to affiliates.
“The executive team and the officers of the company are reporting to private equity,” Pagnato said, contrasting that line of authority with the future he has chosen. “Being independent, our shareholders are our clients. There’s no middle person between us.”
Pagnato would not comment on details of the exit agreement, other than to say he and Karp “reached an amicable agreement…to be completely separate and on our own.”
Mark Hurley, chairman and CEO of Fiduciary Network, which offers succession financing to registered investment advisors, said their decision speaks volumes.
“The problem with rollups in general is that they’re giving out a security [equity] with indeterminate liquidity that does not generate cash flow,” he said. “It’s an instrument that only has theoretical value, and at some point theoretical value has to turn into actual value or people stop believing it has any value.”
HighTower earlier this year told its affiliates it will delay making a decision about whether to take the firm public until at least 2018, two years behind its original forecast. Pagnato said the delay did not play a part in his team’s decision to leave.
The brief history of IPOs in the rollup space has been bleak. NFP Corp., a consortium of insurance brokers, financial planners and independent broker-dealers, had a bumpy 10-year ride as a public company that saw its stock drop from $23 to below $1, and was taken private in 2013. Last month, NFP said it will sell its independent broker-dealer arm to a private equity firm.
Edelman Financial similarly went public in 2010, only to retreat back to private ownership two years later.