When the decision was made by senior executives and advisers to buy out UBS Wealth Management and create wholesale advice outfit Crestone in 2015, there was considerable risk for all involved.

Leading the venture was Michael Chisholm, then managing director and head of wealth at UBS who went on to become CEO of the new group.

Speaking to Professional Planner, Chisholm recalls just how much was on the line.

“It’s a pretty daunting prospect to go out with your own money, and for most of us it was a vast amount of our personal wealth,” he says. “We thought long and hard but we saw a terrific opportunity.”

Turns out it was. Despite walking headlong into a royal commission era, Crestone has flourished to become one of the fastest organically growing wealth management firms in the country. Assets under management have swollen from $14 billion at launch to $25 billion today, and while only 70 of the initial 95 UBS advisers came across the number has risen back to 91 today via steady and selective recruitment.

A lot of Crestone’s success has to do with their model. Being a wholesale advice outfit, the firm benefits from a lighter regulatory touch and a lower administrative burden than retail investors.

Then there are the firm’s clients – mostly wealthy families with investable funds ranging from a few million dollars to $1 billion. The simple average across Crestone’s 3,500 clients is $8 million. While much of the industry struggles with the cost to serve, the firm had a 12 per cent increase in revenues to $120.5 million and an EBIT of $10.8 million in FY20.

But to attribute Crestone’s success to its wholesale model would be reductive. Like any business, you’ve got to do it well.

The right investment fit

As Chisholm points out, doing wholesale advice well means catering to investors with long investment horizons, increased capacity and a need to invest in more diverse and less liquid classes.

“For a high-quality asset allocation model you need a big team behind you to do the heavy lifting on analysis, research and deep due diligence,” he says. “You need to cover all the equities from small to large cap, all the fixed income, international equities, alternatives, PE, VC, property, infrastructure, commodities and foreign exchange.”

Crestone’s real value add, Chisholm says, is the partnerships it has forged with the likes of Blackrock, Charter Hall, Brookfield and a host of private equity players to bring institutional grade investment opportunities to wholesale investors.

“We’ve introduced some extraordinary products to the market over the last few years,” he says. “Someone with three or five million dollars can have an investment profile like a family office or super fund.”

The client side of the table

While Crestone is keen to partner up with providers to bring new products to the wholesale market, Chisholm takes a much dimmer view of wealth management firms themselves being product providers.

The retail advice market remains dominated by institutions heavily invested in vertically integrated models, but the CEO has a fundamental belief that there should be clear lines of demarcation between product and advice.

“We’re against product manufacturing, you can’t do that and objectively assess products in the market,” he says. “We always want to reside on the client side of the table.”

Regulators aren’t the only ones increasingly wary of egregious vertical integration, Chisholm notes.

“I think you’re seeing consumers vote with their feet,” he says. “Clients transitioning away from vertically integrated models to specialist firms in advice… is a clear signal that that’s where the market is growing.”

Whether vertical integration eventually gets banned will depend on “the expectations of the public”, he says. Until then, it’s up to individual advisers to make a judgement call on where they stand.

For Chisholm and his team, that call has already been made.

“The most important thing for an adviser is to demonstrate that you’re doing the right thing and have removed all conflicts of interest as much as possible, otherwise there’s always a fear in the back of the client’s mind.”

The need for protection

Chisholm is aware that the wholesale advice model is well overdue for a shakeup, with sophisticated investor rules based on monetary thresholds that are two decades old.

Under the Corporations Act anyone earning $250,000 for two years or holding $2,500,000 in net assets can be classified as a wholesale investor and accept securities offers without receiving a product disclosure statement or other basic protections afforded to retail investors.

In the 20 years since these figures were adopted income levels have risen dramatically. These days, someone with $250,000 to invest is less ‘sophisticated investor’ and more ‘comfortable middle-class’, which means more people are vulnerable to predatory providers.

Bringing these benchmarks to a more appropriate and contemporary level probably won’t touch Crestone’s client base, but it’s something Chisholm believes should happen.

“Anything that offers protection is obviously key,” he says. “Our clients probably don’t sit within that group, but I can definitely agree with the need to update to protect vulnerable investors.”

Primed to benefit

Chisholm is acutely aware of the challenges facing advice practices today. Among the many, he identifies cyber security and governance controls as issues that CEOs will need to have a laser focus on in the immediate future.

“I see my job as CEO is not just to talk about investment but also the stuff we do to build a safe environment for our clients’ wealth,” he says.

The advice market is in a period of rapid evolution as the banks finalise their departure while a suite of mergers and acquisitions play out.

For Crestone, the period marks a second significant wave of opportunity.

“We’ve built a really high-quality institutional quality advice firm,” Chisholm says. “Market disruption has caused a lot of advisers to think about what kind of business they want to be part of. I see that disruption only accelerating in the next few years, and we’ll be a beneficiary of that.”


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