Family office consultant Joe Reilly interviews Stephen Prostano, former CEO of Silver Bridge, about working with talent, consolidation in wealth management and if he would have done anything differently.

This month, family office consultant Joe Reilly interviews Stephen Prostano, former chief executive of Silver Bridge, about working with talent, consolidation in wealth management and if he would have done anything differently at Silver Bridge.

Joe Reilly:  Back in 2006, you started Silver Bridge on the path to becoming a national brand.  Was the strategy clear then, or did you make major changes along the way?

Stephen Prostano: The strategic plan I developed in 2006 set the stage to build a leading national, independent brand.  It involved a complete turnaround of the business including the rebranding of the firm in 2008 from Hale and Dorr Capital Management to Silver Bridge.

We followed the plan almost to the letter, but there are things you can’t always predict as we saw with the stock market crash and Madoff scandal in 2008. We responded effectively to the market conditions as well as to client needs and sentiment, but we also made a number of adjustments to our offering and the approach we used with prospects and clients.

The key changes included: offering our services on an a la carte basis; launching an educational initiative, the “Silver Bridge Institute” for clients and prospects; and offering a number of consulting services to prospective clients for a fee. These changes allowed prospects and new clients to get to know us and proved to be quite successful in an uncertain time.

The original Silver Bridge client base included both HNW and UHNW individuals and families. But we determined, after reviewing the competitive landscape that a sub-brand, would appeal to multi-generational families and family offices looking for a MFO that could serve as an integrated service platform for their needs. 

We established Silver Bridge Family Office Partners in 2009 with the belief that it could become the first successful “aggregator” of SFOs and MFOs looking to lower costs, reduce risk and more effectively manage their businesses. And we were right.

As part of our plan, we also responded to a need and trend we were seeing among the UHNW. Families were becoming increasingly concerned with the long-term impact of their wealth. They wanted to create and sustain a legacy over multiple generations and have a positive impact on society as a whole. 

As a result, we pursued a variety of strategies such as new hires, partnerships, joint ventures and alliances to provide many of these non-financial services, including; strategic philanthropy, family governance and development, family business consulting and education. These proved to be an extremely important set of service for many of our UHNW clients, and formally became part of our Mission Statement in 2009.

I think the bottom line message here is that an organization should always have a long-term strategic plan, but it needs to be flexible and nimble enough to respond to client needs and industry trends if it hopes to be a leader in this industry.

Joe Reilly:  Would you build the company the same way again?  What would you do differently?

Stephen Prostano: There is nothing I would do differently in terms of the strategy to turnaround and build Silver Bridge into a national brand.

However, we noticed multi-generational families that were considering joining Silver Bridge as clients were looking for an independent, sustainable firm, controlled by management, and with an independent board.

In retrospect, I would have incorporated these things into the equity plan we originally designed.  I would have also brought in strategic investors who had knowledge of the wealth management and MFO industries and the capital to invest in one significant acquisition.

Joe Reilly: Do you think there is still a place for the older style "Boston Model" of wealth management?

Stephen Prostano: Historically, these investment practices served a purpose. They provided an ancillary service to the trust and estate practices of law firms. 

These investment capabilities, however, were never a core or strategic business for a law firm, and the business development and growth strategy has typically been insular or captive. This made it difficult to attract, hire and retain talent that can compete with firms in the financial services industry.

After we completed the turnaround and the re-branding of the firm to Silver Bridge, we pursued an external growth strategy that was not dependent on our parent company. This enabled us to attract the best talent, and all of our growth and referrals came from external referral sources. As a result, we were able to triple our assets in less than four years.

I don’t believe that there is another wealth management or investment subsidiary of a law firm that experienced the same support from their parent company and the ultimate success Silver Bridge realized.

Joe Reilly: What are your thoughts on the current market for wealth management businesses?

Stephen Prostano: I believe we will see a significant expansion in the private wealth management industry, but at the same time consolidation among smaller MFOs. The opportunity in the wealth management space is recognized, and there appears to be a significant interest in all of the private client areas - HNW, UHNW and family offices - by private equity, financial institutions seeking strategic acquisitions, private investors and funded aggregators.

Over the last five years I have spent a significant amount of time speaking to industry leaders, consultants, custodians, RIAs, MFOs, wealth management firms, the “aggregators,” private equity firms, private investors and other industry service providers. There is significant interest in the UHNW and family office space. The opportunity is perceived as unlimited and global, and the market is extremely fragmented.

Over the next two decades, I believe you will see a proliferation of new entrants. But a clear set of leaders will emerge, who understand the needs of the UHNW and have the management experience, expertise and leadership abilities to build a sustainable, highly profitable boutique that delivers institutional quality products and services.

On the flip side, many MFOs have evolved and emerged from an SFO starting point. They have the same management and often face the same issues related to costs, risks, and talent that they did when they were an SFO. I believe these firms will look for opportunities to outsource their capabilities and combine with other like-minded firms with similar cultures and values.

Transaction activity historically has followed the equity markets, albeit with a lag, which is an encouraging backdrop. Regardless, I would expect consolidation in the industry and the transaction activity to continually improve and accelerate. 

This will be driven, not only by the interest of aggregators like United Capital, Dynasty and HighTower, but by aging RIA founders, and the difficulties and issues faced by smaller wealth advisors and MFOs under five billion, which include the lack of scale and profitability, management expertise and enough capital to stay competitive and comply with regulations. These issues will cause many of these firms to pursue partnerships and combinations.  

Joe Reilly: So do you see the current roll-up models such as Dynasty leading the consolidation of the industry vs. established players looking to acquire assets?

Stephen Prostano: I believe that both models will contribute to the consolidation in the industry and increase in transaction activity - but in different ways.  Both have issues that could derail the approach taken and their effectiveness serving clients.

The roll-up models such as Dynasty, HighTower and United Capital, are  “aggregators” of RIAs and break away brokers serving HNW clients, who are looking to remain independent and require a lower cost integrated platform to leverage.  

The model is relatively new.  HighTower has pursued the strategy for the longest, but has made significant modifications to their offering in the last 18 months. They all appear to struggle with pricing and profitability, which will limit their ability to move into and take advantage of the opportunity in the UHNW and family office space.

The more traditional and established players looking to acquire assets by adding teams and acquiring firms, may lead the consolidation of firms in the UHNW and family office space like wealth advisors and MFOs. 

The key to their success will be their ability to integrate the firms and their teams in a way that ensures the consistent delivery of high quality services to their clients.  Few management teams, however, have the experience acquiring and effectively integrating firms, which may have contributed to the downfall of GenSpring and Boston Private, for example.

Joe Reilly: How important is culture in an MFO? Does it differ qualitatively from a private bank or trust company?

Stephen Prostano:  Culture and values are extremely important in any organization, whether it’s an MFO or a private bank. They impact the type of people you hire and retain, drive behavior, organizational performance and ultimately client satisfaction.

In a well-run organization, the culture is defined and driven from the top down, regardless of the size or type of firm.  It will also be a function of the leadership skills and capabilities of the senior management team.

Joe Reilly: Where do you feel the leading multi-family offices demonstrate strength? Weakness?

Stephen Prostano: The leading multi-family offices are typically strong in one or more product or service areas such as investments, tax and accounting, wealth planning or family office services. This is often dependent on the founder or senior management’s interests or expertise.

The weaknesses I have seen primarily relate to management’s inexperience and leadership skills. This impacts the MFO’s ability to plan strategically and execute; grow the business through marketing, business development or acquisitions; and run the organization at various stages in the organization’s life cycle.

Another weakness I consistently see is that very few firms truly provide fully “integrated” wealth management services.

Joe Reilly: Staff compensation is a substantial part of an MFO's costs. Are there ways to increase the operational efficiencies of MFO staffing while offering a full suite of services?

Stephen Prostano:  Yes, there are a variety of ways.

Firms must focus on and invest in their technology platform. This will consistently increase the operational efficiencies of the organization, but also support the effective delivery of client and advisor related strategies as well as products, services and risk management. 

An integrated technology platform and the outsourcing of various operations and technology functions are cost effective and efficient ways to reduce staffing costs.

MFOs can also focus on delivering internally only a core set of capabilities and utilize alternative strategies for all non-core services a family may need. Alternative strategies include joint ventures, minority interests, partnerships, and strategic alliances.

In my experience, families need their advisor to address, manage and coordinate all the key strategic issues for the family. But not every service needs to be delivered directly by the MFO.

I believe there are a core set of capabilities: wealth planning, investment advice and trust services, utilizing alternative strategies for financial management, family office services, tax compliance, strategic philanthropy, family governance and development and family business consulting and education. By delivering these internally, MFOs can significantly increase the operational efficiencies within the organization and reduce staffing costs.

Joe Reilly: Good advisors: bred or bought?

Stephen Prostano: Over the course of my career I have had the opportunity to mentor, train and watch young advisors grow and mature, but I have also seen the value of bringing in senior talent from outside the firm.  So I believe great advisors can be bred or bought.  In fact, firms should use a combination of these two strategies to build and grow their businesses.

But regardless of the strategy, it is essential for firms to have a clearly defined career path and development plans for their advisors - which should be supported by comprehensive internal training programs for each advisor level. Additionally, client service standards and protocols, service delivery policies, as well as procedures and controls that are monitored by management, will also ensure consistent delivery by advisors and a consistent client experience.

The benefit of bringing in senior talent from outside is that the firm is exposed to new ideas and potentially best practices utilized by other firms, which allows the firm to rethink their approach, change, evolve and continuously improve.