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Arbitrage and momentum in advisory consolidation

Thomas Coyle

5 November 2007

The deals are coming in faster now than ever as aggregators race the clock. The pace of wealth-firm aggregations seems to be picking up. Adding to recent purchases by comparative newcomers Focus Financial Partners and United Capital Financial, veteran advisory acquirers WealthTrust and Boston Private Financial Holdings have moved to expand and solidify their respective affiliate networks. For all the activity so far, however, industry participants say it's just a foretaste of deal-flow to come as savvy buyers wave wads of cash and parent-company stock under the noses of liquidity-strapped firm owners in need of viable growth-and-exit strategies.

"You're going to continue to see this kind of activity for a while," says Elizabeth Nesvold, managing partner of New York-based M&A consultancy Silver Lane Advisors, referring to recent acquisitions in the RIA space. "The firms doing the roll-ups take different approaches but assets under management," says the Undiscovered Managers study. The have-not category also includes "firms that generate between $1 million and $3 million in annual revenues but have unattractive client bases or are inefficient."

The haves meanwhile are "mid-sized firms with annual revenues of $1 million to $3 million, and a small percentage of organizations that have less than $1 million in annual revenue but more than $25 million of assets under management," says Back to the Future. "Although not yet large companies, these mid-sized firms have robust client bases, are profitable and have the resources to grow their organizations over time."

Aggregation, however nascent, is widening the gulf between have and have-not firms as the haves, pressured by large competitors, coalesce into groups of 40 or 50 "highly profitable" organizations.

Momentum

WealthTrust, Focus, United and Dallas-based Fiduciary Network, run by Undiscovered Managers founder Mark Hurley are -- the odd 401(k) administrator aside -- fairly pure-play aggregators of fee-based, client-facing wealth-management firms. Boston Private, with considerable holdings in institutionally oriented asset management, straddles the pure-play set and a group of asset-manager aggregators with private-client sidelines like Affiliated Managers Group, Asset Management Finance and Convergent Capital Management. (Boston Private stands apart from other firm-wide aggregators in having already gone public.) Another half-way participant is insurance-brokerage network National Financial Partners.

Meanwhile momentum is becoming as important to attracting new affiliates -- a key ingredient to reaching the critical mass necessary to the arbitrage that underlies many aggregation plays in the wealth-management space.

WealthTrust's acquisitions of Fairport and Axiom were its first since it bought Scottsdale, Ariz.-based DeGreen Wealth Management (now WealthTrust Arizona) in the fall of 2006. That followed hard on a private-equity infusion that let WealthTrust get back on the acquisition trail after a two-year hiatus imposed by regional brokerage Morgan Keegan, its erstwhile owner.

"It feels good to have closed a couple more," says WealthTrust's CEO Rusty Benton. "But we never went away: we had to spend time pulling functions out of Morgan Keegan, and on re-integrating our systems, but that's done and we expect to do a couple a quarter next year."

United's CEO Joe Duran agrees that it's helpful to be seen as an active acquirer. "People look and say, 'Those people are doing things' -- it's very important." -FWR

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