Breakaway brokers' haven sees exodus in wake of venture-capital investment. In another sign of venture capital's enthusiasm for the wealth-management industry, US Fiduciary has received an infusion of private-equity funding from New York-based Inter-Atlantic Group (IAG). But the wealth-management platform provider's boon coincides with the departure of four of its top executives.

Houston-based US Fiduciary "demonstrates [the] ability to successfully execute the integration of a high-net-worth-focused registered investment advisory practice with a broker-dealer -- a business model IAG considers an attractive niche opportunity in the financial services industry," says IAG's co-chairman Frederick Hammer.

US Fiduciary's founder and CEO Steven Graubart says the firm's hybrid advisory-brokerage platform has proved especially compelling to former wirehouse advisors who want the genuine fiduciary status of an RIA along with the flexibility to maintain and initiate commission-based business.

"The repeal of the 'Merrill' convention has put fiduciary standards at the forefront of people's minds," says Graubart, referring to a recent U.S. Court of Appeals decision to overturn a Securities and Exchange Commission rule allowing brokers to provide investment consulting services without registering as fiduciaries under the 1940 Investment Advisers Act. "That's in our favor -- especially if the outcome is the need for significant consumer warnings" to retail brokerage clients," says Graubart.

In addition to the new funding, US Fiduciary said it has opened its tenth and eleventh affiliate offices in Murrells Inlet, S.C., and in Joliet, Ill.

The departed

But the departure of US Fiduciary's number two Elliot Weissbluth and three of the firm's business-function heads in the wake of its deal with IAG may prove a setback.

Weissbluth, who was US Fiduciary's president, CFO Cindy Burnette, compliance head Matthew Reynolds and sales and business-development chief James Lynch negotiated separations from the firm within days of each other last month.

Weissbluth, Reynolds and Lynch declined to comment. Burnette couldn't be reached.

There's no word on Weissbluth's current employment or plans. Formerly head of marketing at Darien, Conn.-based CRA RogersCasey, he came to US Fiduciary initially as an investor and a board member.

There's no indication of Burnette's next move either. Before joining US Fiduciary she was CFO of Houston-based Coastal Securities.

Lynch is now head of broker recruiting and business development at Chicago-based Advanced Equities. Reynolds starts there today as chief compliance and operations officer in the firm's private-equity division. Before joining US Fiduciary late in 2005, Lynch was an executive with Banc of America Investment Services, Bank of America 's independent brokerage subsidiary. Before that he was a broker with Morgan Stanley. Reynolds was head of compliance for Chicago-based investment bank Howe Barnes. Before that he was with RogersCasey.

Jay Penney, a US Fiduciary-affiliated advisor in Scottsdale, Ariz., is disappointed about Weissbluth's departure. "I like Elliot very much," he says.

George Wislar, a US Fiduciary advisor in Princeton, also regrets the turnover. "Jim Lynch was my first contact at the firm," he says. "I can say he's a good friend." He describes Reynolds as "a great and very sincere guy and one of the hardest-working people I have ever met."

Graubart isn't saying why his colleagues have gone.

According to Penney, however, Weissbluth left because of "a disagreement" with Graubart "over which private-equity deal to accept."

Penney adds that Graubart has short-listed candidates for all the vacant positions.

"I'm not sure what's going on there and it's a little bit scary," says Penney, who was affiliated with ING USA subsidiary Multifinancial Securities until he switched to US Fiduciary late last year. "But I left a large firm for very small firm, intentionally, in order to have more input and so far it has worked out very well."

$4 million

US Fiduciary characterizes IAG's investment as "significant" without providing further detail. According to Wislar, IAG is putting up about $4 million.

Graubart, who used to be a multi-franchise owner of Sylvan Learning centers, says the new money will fund enhancements to US Fiduciary's operational, technological, and research capabilities.

Penney says IAG's investment looks like a long-term commitment. "I guess it's a positive," he says. "Hopefully they'll use the money appropriately."

US Fiduciary started out in 2004 with two advisory offices through the pre-launch acquisitions of Houston-based Post Oak Capital Advisors and Chicago-based West Hills Asset Management. Since July 2005 it has established former wirehouse, large IBD or big-bank brokers in offices in Philadelphia, Palm Beach Gardens, Fla., Traverse, Mich., Princeton, N.J., Scottsdale, Ariz. (where US Fiduciary has two affiliates), Leesburg, Va. -- and now of course its brand new affiliates in Illinois and South Carolina.

US Fiduciary also provides back-office support to a New York-based private-client advisory run by hedge-fund specialist David Zale.

In addition, advisors with Chicago-based New Century Bank, Palo Alto, Calif.-based Addison Avenue Financial Partners and Chicago-based brokersXpress use US Fiduciary's investment platform.

A place to put it

IAG's investment in US Fiduciary is in keeping with a trend as venture capitalists show unprecedented interest in the high-net-worth-advisory space. In the first three quarters of 2006, wealth managers raised about $300 billion from private-equity firms, according to New York based investment bank Berkshire Capital, which last fall saw the total hitting $400 billion before the end of December last year. In 2005 wealth-management firms got $283 billion in venture funding.

One of last year's marquis deals came when Boston-based venture firm Summit Partners put $35 million into Focus Financial Partners, a New York-based holding company for fee-only advisories. Later in 2006 New York-based private-equity firm Circle Peak acquired and re-capitalized Nashville, Tenn.-based WealthTrust, another advisory-firm holding company.

Although Berkshire Capital says such deals are the result of the attractive returns to be had from private-wealth firms-- especially compared to those offered by publicly traded equity -- investment banker Ben Phillips of New York-based investment bank Putnam Lovell NBF suggests that the rush may also owe something to a glut of un-invested money. "There's a $300-billion overhang in private equity," says Phillips.

In general though, Phillips agrees with Berkshire Capital's assessment. By broad industry standards investment advisories aren't especially capital intensive and they "throw out a lot of cash" even in down cycles, making them fairly attractive places to park money. -FWR

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