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Consolidating in the US – Where Big Business Meets Independent

Matthew Smith

17 July 2008

The consolidator model, or “roll up” as they are sometimes known, is the newest structure to house financial planning practices to come out of the US – problem is, though, they remain largely untested on their home soil.

Consolidators exist within the same family as aggregators – that is, large financial planning networks that provide services to smaller financial planning practices allowing the members to benefit from the broader group’s economies of scale. The difference is consolidators acquire firms using a combination of cash and script with the promise of one day becoming a publicly listed company.

The economic premise of the consolidator model is based on the pricing differential between the private and equity market.

“What the consolidators are thinking is :‘If we buy in the private market and take it public, we are going to dramatically increase its value,” says Philip Palaveev, president of US consulting firm, Fusion Advisor Network.

One group, National Financial Planning (NFP), has already successfully gone public in the US after establishing itself in 1999 and listing on the NYSE in 2001; NFP currently has 180 practices collectively generating $1.1 billion in gross revenue.

Focus Financial Partners is the most recent consolidator to enter the market in February 2006. Following a buying spurt, aided by $35 million of equity funding provided by private equity firm, Summit Partners, Focus now owns 15 firms advising around 18,000 clients with around $27 billion in assets but is not yet listed. Focus’ most recent acquisition was Greystone Financial Services in the UK.

Established financial planning groups have their reservations about the consolidator model in the US, but the industry still keeps a close eye on the deals that are on the table to attract independent financial advisors.

Chet Helck, president and chief operating officer of Raymond James Financial, admits he remains “open minded” about different ways to partner with financial planning practices, however he considers the consolidator model to be “more of an exit strategy than an operating strategy.”

“We became one of the industry leaders without doing that (buying practices). That’s a relatively recent phenomenon. Our experience is the more successful advisors really have no interest in that model,” Mr Helck says.

NYSE-listed Raymond James as a group provides services to advisors in a variety of ways, but within its Private Client group, it has the exclusive right to service and share in the revenue of 3,500 advisors in 1,500 offices in the US, UK and Canada.   

“We simply contract with them exclusively to provide services – they agree to register as independent contractors with Raymond James and they do all their securities business through the firm,” he says.

“We could, frankly, do this tomorrow if we decided to. There just is no one asking us to.”

The consolidator offer is to acquire advice practices by paying for the business up front, then buy a portion of the ongoing revenue.

According to Elliot Holtz, executive vice president, Marketing & Firm Operations, NFP buys 100 per cent of the business up front and then half the bottom line revenue. This year the group expects to bring in $20 million in base earnings.

Mr Palaveev points out a key premise that underpins the success of a consolidator network is the group’s ability to bring cohesion to individual firms and make them behave like a team.

“This is a giant question mark: how do you get firms that are independent in nature, independent in structure, independently owned, to work towards a common goal. That’s where a lot of them will fall down, but if they can do it, they are going to achieve some pretty amazing things,” he says.

Both NFP and Focus have built incentives into their offers to sustain growth within individual practices by using performance hurdles.

Interestingly, the bonus structure built into the consolidator model has made it a potentially attractive option to brokers who are leaving the large wire houses and looking to start up their own practices.

“Attracting brokerage advisors is not something that was part of the original business plan. It just accelerated with brokers getting in touch with us because they are getting tired for apologizing for their firm, which is what brokers have been doing for the past six months,” says Rudy Adolf, Focus founder and chief executive.

Mr Adolf says he will continue to target established advice practices to acquire, consistent with Focus’ original business plan, but he also eludes to the building business model with at least one new practice made up of a broker’s exiting wire houses.

“All deals closed at this point are with traditional RIA businesses, we’ve just got so much interest from brokers that we view this as an attractive opportunity… we are moving carefully because brokers moving from a sales model to a fiduciary model is very complex,” Mr Adolf says.

The other premise, key to the success of the consolidator model, is the eventual listing of the entity, notes Mr Palaveev.

“In order to work, the network needs to grow quickly enough and get large enough so it can go public… if it gets acquired by someone else, the price is nowhere near as good.

“When you are acquiring and consolidating, basically everyone is putting their equity into the same pot, and if things don’t do well and the entity doesn’t go public, it’s very difficult to untangle the pot and it is very risky for the participants,” says Mr Palaveev.

NPF has, for the past few years, operated successfully as a public entity. However the market’s negative view of financials has resulted in the group’s share price decline from above $55 per share in October last year to slightly higher than $20 today, bringing the value of each individual financial planning firm within the group down with it.   

NFP’s Mr Holtz says the group has proven its ability to get member firms pointing in the same direction, and he says the shift by clients and advisors towards independent advice bodes well for the future success of the model.

“The best and brightest want to be independent, this model allows them to chose the best product for the client based on open architecture systems,” Mr Holtz comments.

The consolidator model – like aggregators as well as any independent financial planning conglomerate – poses the question, can an independent firm remain independent within a larger structure?

Mr Holtz and Mr Adolf will argue the consolidator model allows independent firms to remain independent despite being tied into a collective financial goal, but there is currently no model to point to that it can sustain organic growth in the long term.