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What The Luminous-First Republic Deal Means For The Independent Advice Industry

Charles Paikert

19 November 2012

The verdict among top industry leaders at last week’s Schwab IMPACT conference in Chicago was unanimous: First Republic Bank’s acquisition of Luminous Capital earlier in the month in a generous all-cash deal was considered a very, very big deal for the independent advisory business.

Beyond that consensus, however, executives were divided on whether the scope of the Luminous deal was a sign of things to come, or the exit strategy high-water mark of the breakaway broker movement.

At the least, the deal, reported to be between $125 and $200 million, signals the validation of the independent advisory model and is likely to accelerate the breakaway broker movement, according to industry experts.

“The deal is a strong testament to the value of the RIA model,” said David DeVoe, a San Francisco-based strategic consultant and one of the industry’s leading authorities on mergers and acquisitions. “Luminous is a phenomenal success story, and the attractive valuation underscores how valuable the RIA model has become.”

The firm's meteoric rise to over $5 billion in assets under management in just four years highlights the importance of “growth, scale and business management,” which was rewarded with “disproportionate” sales terms, said John Furey, head of Phoenix-based Advisor Growth Strategies.

Trend or one-off?

But whether there will be many more deals like Luminous is another question.

According to Steve Lockshin, chairman of Convergent Wealth Advisors, who sold his advisory firm to City National bank of Los Angeles several years ago, the Luminous deal “signifies that major regional banks are moving towards high-end, open-architecture, client-centric opportunities.”

Goldman Sachs won’t be buying an RIA anytime soon because “it doesn’t move the needle for them,” Lockshin said, “but buying a Luminous does move the needle for a regional bank.”

Nonetheless, few, if any, future sales are likely to match the term of the Luminous- First Republic deal, argue some industry experts, because of the unusual nature of both companies.

“There aren’t many firms like Luminous out there,” said David Welling, vice president of sales, marketing and client services for Advent Software’s Black Diamond division.

Few advisory firms, for example, have been able to rocket from zero assets to $5.5 billion in a mere four years while at the same time achieving margins said to approach 60 per cent. Nor are many firms able to offer a proprietary, and highly sought after, hedge fund of funds that attracted high-end clients with average account sizes of approximately $10 million as well as stand-alone customers.

Not coincidentally, Luminous partners came with distinguished pedigrees from Merrill Lynch and Goldman Sachs, along with loyal – and very wealthy – clients.

And First Republic, unlike most banks, is known for its high touch service environment, has already bought several wealth managers, and doesn’t cater to the retail mass market. What’s more, the San Francisco-based bank appeared to be an ideal cultural fit with Luminous, which is headquartered in Los Angeles and San Francisco and has most of its customers in California.

Bring on the breakaways

Luminous’ success is likely to incentivize more large wirehouse teams to break away and become independent, said Gib Watson, group president for platform provider Envestnet’s Prima division.

“Luminous is the new model for breakaway brokers,” Watson said. “More corner office guys are going to leave and more RIA firms are going to be bought. There will be a wave of consolidation because this is a real good business. Revenue growth rates and margins are high, so more deals make sense for all parties.”

Continued aggregation is inevitable because advisory firms “aren’t big enough to provide the services clients are demanding,” said Ron Carson, founder and chief executive of Carson Wealth Management Group.

Indeed, HighTower, one of the industry’s most aggressive dealmakers, is already negotiating with seven RIA firms to join the firm as partners next year, said Michael Papedis, executive vice president for business development.

Buy vs. build

RIA growth will be fueled by buying rather than building, Lockshin said, because the cost of time it takes to develop a business internally is more expensive than purchasing existing assets. “Advisors will be looking to merge with other advisors,” Welling agreed.

RIAs and consolidators such as Focus Financial and United Capital Partners will continue to be the “dominant acquiring categories,” according to DeVoe.

Banks, which used to be a leading acquirer of advisory firms before they fell on hard times after the financial crisis, may follow First Republic’s lead and re-enter the field, DeVoe said. “They’ve had mixed results in the past,” he noted. “The question is always how effective the integration will be.”