Leaving a Broker Dealer for “Real” Independence—With a Private Equity Cushion

The Background

It was in 2012 when we first spoke with the four partners of Charlotte-based Cornerstone Financial Partners. When Jeff Carbone, Brian Needleman, Craig Rubrecht and Andy Smith founded their nascent firm in 2001 with just over $30MM, they could scarcely have imagined that Cornerstone would manage greater than $700MM in AUM in just over a decade. During that time, the partners’ discipline and dedication led to great success growing the business, both organically and inorganically.

While Cornerstone grew as an affiliate of a broker dealer, the leaders of the firm soon recognized that offering advisory – rather than brokerage – services would offer greater opportunity, fewer conflicts and a more interesting narrative. As a hybrid RIA, Cornerstone found an appropriate domicile at the time, under the LPL umbrella.

With our first conversations over six years ago, we focused not on the present but on their ambitions for three, five, ten, and even twenty years in the future. In an early meeting, partner Andy Smith articulated the drive and desire to become “a premier regional RIA.” While Cornerstone had a number of compelling growth initiatives that consumed much of the focus of the partners, we stayed in regular contact with the four founders.

The Catalysts

Over the course of the next few years, Cornerstone acquired three practices, expanded assets to $1B AUM and, most impressively, grew the average account size from $600,000 to $750,000. Still, the unrealized ambitions of the team – to profoundly expand the high net worth business, to grow average account balances to over $1mm, to have a partner help develop a well-considered pipeline of inorganic growth opportunities – had not yet been realized.

Our firm helped lead Cornerstone to conversations regarding not only where the four partners saw the firm in the years to come, but, more importantly, the pathway to make that vision a reality. While LPL provided perfectly acceptable services to small- and medium-sized firms, and had been the right partner to Cornerstone during their earlier years, we helped the team begin the process of evaluating other potential capital and strategic partners.

In the early part of the analysis, it became clear to the Cornerstone team that its clients and the firm would be best served by concentrating on growing the hybrid RIA portion of the business, with a focus on custodying the majority of new assets with Fidelity and Schwab. This would offer Cornerstone the opportunity to evaluate the services of both custodians, as well as ease any future transition. We continued our focused contact as Cornerstone deliberately considered a number of options.

By 2015, that potential transition still seemed far off: The large number of accounts to repaper daunted the Cornerstone team. And as typical with most firms, the partners shared varying degrees of enthusiasm regarding the possibility of another platform change in less than six years.

In late 2016, Jeff, Brian, Craig and Andy concluded that the firm had outgrown the broker dealer model and would benefit from a systematic evaluation of all potential options. Cornerstone wished to have access to growth capital and advice for inorganic growth opportunities, the chance to liquefy and diversify a portion of their ownership in the business—a structure that allowed for additional partners and that addressed succession considerations and concerns. The Diamond team articulated a highly focused discipline to help Cornerstone through that evaluation process.

As Cornerstone began their exploration, they ruled out the option of changing broker dealers, as well as the possibility of merging with an RIA of similar size: Neither solution would substantially move the needle, and there would be no access to growth capital. The partners briefly considered adopting a pure RIA structure, putting all assets at Fidelity and Schwab, but also dismissed this for the same reasons. Introductions to and conversations with HighTower Advisors and Dynasty Financial Partners received greater consideration, but were found lacking due to capital access considerations.

The Solution

Our introduction of Cornerstone to Focus Financial Partners led to a perfect fit. Focus, the largest private equity investor in the independent RIA space, serves as a true partner to advisory firms seeking independence, liquidity and growth capital. The leaders at Cornerstone swiftly recognized the benefits Focus presented, not merely because of access to $1.4B in capital, but even more significantly the business practice and process consulting that would significantly drive the firm’s growth and profitability.

The unparalleled facility of the Focus team in identifying and qualifying inorganic growth opportunities could also free the Cornerstone team to focus on their core imperative and competency: Organic growth.

Cornerstone became a member of the Focus Family of Investment Advisory firms in late 2017. To be clear, a transaction including a migration of 4,000+ accounts is no small task. Focus never wavered on their promise to work side-by-side with Cornerstone through the entire transition.

Focus’ purchase of a minority portion of the cash flow of Cornerstone led to many great outcomes. The Cornerstone partners each sold a portion of their interests in the firm, permitting them to diversify their personal net worth. Coincident with the transaction, the firm elevated five leaders in the firm — Jon Brown, Terri Fiessinger, Jeremy Grant, Joe Sweeney and Ed Wood — to Partnership rank, energizing the next generation of firm leadership.

The value of the Focus family extends far beyond capital access and deal flow. Cornerstone partner Joe Sweeney believes, “Focus could not have been more instrumental in the great outcomes we’ve had in our recent searches for senior executives at our firm. Focus introduced us to nearly a dozen partner firms, each of which spent an hour or more offering their counsel.”

And Jeff Carbone noted, “I’ve already seen the benefits of sharing the collective experience and wisdom of 50+ fellow partner firms.”

“After extensive due diligence, Focus turned out to be a perfect fit for us because of its ability to provide superb access to capital, expertise in M&A and value-added growth support. We have enjoyed collaborating with Focus in all aspects of the business,” said Craig Rubrecht, CEO of Cornerstone. “Since the inception of our firm, we have held ourselves to an exacting standard, as we provide comprehensive wealth management and retirement plan consulting services to our clients. We take pride in the trust we have built with those clients over the years. We are confident that Focus can help us build upon that foundation to create an even better experience for every client, consistent with our goals for organic and inorganic growth.”

The Present

Reflecting on the transition, partner Brian Needleman observes, “With offices throughout North and South Carolina, as well as San Francisco, Cornerstone is well-positioned to expand across the Southeast as well as the West. It’s hard to believe there could be a better combination than the power and agility of the Focus professional team, partnered with the RIA, wirehouse, broker dealer and hedge fund experience of Cornerstone’s executive group.”

As of this writing, the dust has settled from the transition of those thousands of accounts. The nine Cornerstone partners are confident that their now $1.2B AUM, $10mm revenue enterprise is ideally positioned to at least double over the next five years. And, the partnership with Focus and the long-standing guidance of Diamond Consultants leaves Cornerstone able to realize their vision of becoming a “premier regional RIA.”

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