In early March, the picture didn’t look promising for Rich Parker and his veteran equity sales and trading team. Only weeks earlier, they had experienced the shock of their lives when regulators shuttered their firm, the Stanford Group Co., and put it into receivership.
Parker’s group of nearly 40 pros found themselves out of work after financial irregularities, estimated in the billions, were uncovered in a separate part of the firm–far from the Stanford equity trading desk. The scope of the event generated headlines around the globe and came only months after the news of Bernard L. Madoff’s fraud.
The desk could blame its predicament on a bad break, but there was little consolation once the team members were out on the street, looking for work at a time when the major stock indices had just touched a 12-year low, Parker said. “There were some difficult days walking around New York, when markets were down big, and I was still asking myself, ‘What just happened to us?'”
Parker knew he had his work cut out for him. It’s not exactly a bull market for unemployed traders, sales traders and research salesmen these days, and here he was trying to place an entire team–a tough assignment even in the best of times.
His ace in the hole, however, was an in-house research product: the Washington Research Group, co-founded by Ed Garlich. WRG, which Stanford bought in late 2004, had carved out a healthy niche during more than 30 years of offering institutional research on public policy. And how policy from Washington affects stocks and markets these days is hot, as the federal government leads the bailout of financial institutions and pushes to stimulate the economy with increased spending. There’s a lot of money floating around the nation’s capital these days, and investors want the inside story on what it means to them.
“Customers wanted to get the product,” Parker said. “We had been working on the first hundred days, which was very well received, when the rug got pulled out from under us. It couldn’t have been worse timing, and we needed to get back into seats right away.”
Parker and WRG shared a long association. He had already built the product earlier this decade when he worked at Schwab Soundview. He then did it a second time at Stanford Group. There, he helped turn the research sales and trading effort into a $38 million business in 2008, say two knowledgeable sources.
But if he hoped to maintain momentum driven by the times and client demand, Parker & Co. didn’t have a lot of time. One brokerage official familiar with the firm and WRG said Parker’s only choice was to bring his team to an established broker; otherwise, it would take six to eight months to get a broker-dealer license to start out fresh as a new firm. The clock was ticking. Parker also needed to find a firm that did not have an established distribution network for research and trading–he already had a team that knew this specialized product inside and out, and they had existing relationships with clients. His goal was simple: Save as many jobs as possible.
“They were in demand,” said the same brokerage official, whose firm wanted to bring in WRG. But it already had a distribution network, so he knew a deal was unlikely.
Fortunately, more independent firms are either springing up or aggressively expanding these days, partly taking advantage of the outbound flow of talent from bulge bracket firms. In some cases, they’ve been let go due to downsizing, or they’ve fled due to meager or nonexistent bonuses. And these independents are looking to get into new businesses by scooping up experienced traders, salesmen and analysts.
After a short courtship of about a week, the former Stanford Group’s institutional trading group and research arm landed at Concept Capital, a newcomer to the institutional trading space.
Only months earlier, Concept had committed to building a capital markets unit when it hired former Citi executive Robert Moore, a respected 32-year veteran who spent most of his career at Smith Barney. Up to that point, Concept was a little-known firm outside of its niche of servicing hedge funds.
Concept Capital is a division of Houston-based Sanders Morris Harris Group. SMHG is expected to spin off Concept this summer to concentrate on wealth management. At that time, SMHG will own 43 percent of Concept, with Concept employees owning the balance.
As Moore tells it, several institutional clients knew he was looking to build his new firm on a foundation of independent research. They suggested he look at bringing in the Stanford team–or as many of them as he could, since the business needed to be kick-started again.
Meanwhile, Parker was doing his due diligence, talking to about a dozen firms. He settled on Concept as the best fit because it was a new firm that had little overlap on the coverage side and also because it had good technology due to its hedge fund business.
“We were able to pull it off in what was a pretty difficult tape,” Parker said. “We’re happy to be back working.”
Out of 17 Stanford traders and sales traders, six of them joined Concept. On the research sales side, out of the 23 Stanford research sales people, about one-third made the cut. “Hopefully, as the business grows, we’ll be able to get more of them back,” Parker said. Almost all of the sales traders are back working, he said.
On the research side, about 90 percent of WRG came along for the Concept Capital move. Three analysts found jobs elsewhere. Keeping the research team close to intact was important, according to Moore, because about 95 percent of the research-driven orders at Stanford Group came from money managers who specifically wanted to pay WRG.
Moore sees opportunity for small firms on Wall Street. “If you add value to the clients every day, you can build a firm,” Moore said. Good research and sales and trading are the cornerstones, he added.
He also sees a major shift in attitude among investment pros on Wall Street as to where they are willing to work. Because of the financial crises, big banks have been handcuffed in their ability to compensate key employees. And that is opening up opportunity for firms like Concept Capital and other independents looking to make their mark on the Street. They can offer competitive deals for top talent, now that compensation levels have fallen at the big banks–where job security might also be an issue.
The other driver behind the phenomenon, Moore said, is that smaller firms don’t face the issue of other departments suffering major losses, which can dramatically affect bonuses across the board. That’s what happened at firms with big portfolios stuffed with mortgage-backed derivatives, even though cash equities had a banner year in 2008. Also, because the payouts at smaller firms are more frequent, whether monthly or quarterly, bonus money isn’t tied up for long periods of vesting. Moore said he expects Concept to pay production people in cash on a monthly basis. They will also be given opportunity to buy stock in the company, and stock may also be awarded in some instances.
“I think the key for us to making this [firm] work is that we fully wanted everyone to own a piece of the company,” Moore said. “We also wanted to build the next Smith Barney…build a brokerage on the partnership model of Wall Street.”
He joined Smith Barney in 1982, when it was, as he described, a “tiny” player in the institutional equities business. He became a partner four years later, right before it was acquired.
Moore isn’t the only executive at an independent shop fielding resumes from individuals and teams of traders and salesmen. To be sure, other independent firms have similar models. But he thinks Concept Capital is in a good position to hire experienced pros now willing to leave large firms to build a business at firms like his. That was unheard of just a year or two ago, he added: “This is a great opportunity for a firm like ours.”
Concept Capital’s game plan is to add fundamental analysts to the areas of research that WRG covers in Washington. “We want to vertically integrate the silos with single-stock analysts,” Moore said. “We want to complete the verticals, so we’re strong in finance, defense, health care, media and energy.”
Moore has big plans for Concept. “I think that we can hit $25 million this year in the cash business,” he said. He also expects to gross another $4 million to $5 million in fixed income. With additional growth through new hires, primarily by hiring teams of traders, Moore thinks the capital markets group could generate $50 million next year and then reach $100 million in 2011.
On Monday, March 23, the former Stanford Group traders and salesmen started at Concept Capital. That also marked when the WRG research, which had been shut off for more than a month to clients, began to flow again.
Rich Parker’s newest home also brings him back to familiar territory: This will mark the third brokerage in which he’s had to relaunch a sales and trading effort around WRG.
“We have to build the business back up,” said Parker, who heads equities and reports to Moore. Both say they are ready for the challenges that lie ahead–for their firm and the industry at large.
“You’ll have winners that will come out of this,” Moore said, “and we hope to be one of them.”
