Two years ago, Kochis Fitz and Quintile Wealth Management LLC were two highly successful West Coast wealth managers facing the same conundrum.
How, they wondered, could they grow and achieve a higher level of client service without the upheaval and loss of independence that often follow mergers and acquisitions? Furthermore, could they expand and still provide stable and quality service for clients, lasting independence and a compensation and reward structure that would attract and retain top talent?
As it turned out, these two firms, separated by 400 miles of California coastline, found the solutions at each other's doorstep.
On January 1, they completed a merger that, according to its principals, created the third-largest independent wealth management firm in the nation and the largest in California. Initially called Kochis Fitz/Quintile, and then renamed Aspiriant in May, the new firm has $5 billion in assets under management, about 400 clients and a total of about 70 or so employees working in both San Francisco, where Kochis Fitz was founded and headquartered, and in Los Angeles, the home of Quintile.
Aspiriant is now embarking on a five-year plan to become a nationally known wealth manager, with an eye toward markets such as New York, Chicago, Dallas, Seattle and Denver. Notably, the firm has eschewed outside financing. In a departure from the type of merger and acquisition activity that has gained momentum in the advisory industry in the past several years, Aspiriant was created without the involvement of an investment bank, a roll-up company or any other outside investor.
The firm has instead taken the unusual step of supporting the merger by taking on partners internally. The instant the merger was consummated, 18 former Kochis Fitz and Quintile employees became shareholders, so that now 32 of Aspiriant's employees are principals. Under the plan, when shareholders retire or decide to cash out their shares are put up for sale to other principals.
"Our plan is to have, in a sense, a never-ending transition from older- to younger-generation owners," said Tim Kochis, who founded the former Kochis Fitz in 1991 and who will serve as the CEO of Aspiriant in 2008 and 2009. "After a while, you learn never to say 'never,' but as much as we can plan, we intend to remain permanently independent."
Modeled after the way law and accounting firms do business-the difference being that Aspiriant has spread ownership to a large pool of shareholders rather than a handful-the ownership structure is designed to attract top talent and keep it while creating an ownership succession plan that allows clients to be confident the firm will remain stable and independent for the long term.
Aspiriant expects this ownership plan to guide its expansion into new markets. Instead of being "acquired," firms will be added to Aspiriant and their owners will be added as shareholders whose stakes are based on their firms' valuations.
Robert Francais, one of Quintile's founders who is now the COO of Aspiriant and the person in line to become CEO in 2010, notes that when Quintile and Kochis began discussing a merger in January 2007, it was clear both firms placed a high value on remaining independent. They also recognized that giving employees a stake was a key ingredient in maintaining that independence-both firms had been expanding opportunities for employees to become partners even before the merger talks.
"I would say this is a human capital roll up as opposed to a financial capital roll up," Francais says.
A 'Merger of Equals'
The merger was set in motion when Kochis and Robert Wagman, a principal and founder of Quintile, sat down for a friendly lunch meeting in January 2007. They had known each other since both worked at Bank of America in the 1980s and had remained in touch.
As both recall, there was no set agenda for the lunch meeting, but they did find themselves discussing the capital transactions and roll ups taking place in the advisory industry. Soon, they were each talking about the growth aspirations of their firms and their shared desire to remain independent.
As Kochis recalls, it was Wagman who first proposed the merger. Wagman says it was something "we both had in the back of our minds."
The lunch meeting led to another meeting, involving both Kochis and Francais. This led to more substantive talks and, eventually, a letter of intent to merge in June 2007.
"After having met with many potential merger candidates over the years, I had narrowed the 'deal breaker' questions down to about ten, and meeting new firms became similar to what I imagine speed dating to be like," Francais said. "The day Tim and I met, we got through the initial round of questions pretty quickly and without issue, and I think we both walked away from that meeting with a strong sense that the firms were a good match."
Francais likes to call the creation of Aspiriant a "merger of equals" and, on paper at least, that seems to be an apt description. At the time of the initial talks, each firm had about $2.5 billion under management and a staff of about 35 employees. They were also growing net income at the rate of about 25% per year.
Both firms needed to get bigger to sustain growth, retain talent and thus capably serve the growing clientele, and both had been trying to figure out a way to expand for a number of years. Kochis' co-founder Linda Fitz, who created the firm with him in 1991, had been talking about opening up an office in Los Angeles for at least 10 years. "We needed to attract more clients in order for the firm to be an attractive place for people to buy into as they were buying our shares," Fitz says.
Quintile, founded in 2002, had been searching for a merger partner for more than three years. The firm had had discussions with about 20 potential candidates during that time without it leading to any serious negotiations.
The similarity in the backgrounds of Quintile and Kochis Fitz employees may have also played a role in drawing the businesses together. Many of them were CPAs or had some type of accounting background. Aspiriant's principals have careers that trace back to PricewaterhouseCoopers, Deloitte & Touche and the former Arthur Andersen accounting firms.
Several of the current principals knew one another when they were colleagues at these firms.
Noting the accounting background of most Quintile founding partners, Wagman says this probably influenced their decision to seek out a merger partner several years into the business. "We come from larger organizations and organizations which kind of appreciate resources and geographic scope," he says. "We always had a notion that it would help our clients and our business if we had more resources."
Nikki Michelini, a CPA and principal who serves as Aspiriant's director of wealth management in the Los Angeles office, feels that the two West Coast offices share a common philosophy when it comes to serving clients. "I think, if anything, what perhaps it brings to the organization is a commitment to the client," she says. "Commitment to the client is part of our core values."
The like-minded approach contributed to a streamlined merger. In the creation of Aspiriant, Kochis Fitz and Quintile decided to use only one investment bank and one law firm to handle the necessary valuation and legal work. That was partly done to reduce costs, according to the principals. But it nonetheless reflected a level of trust not always found in a multi-billion-dollar transaction.
"It's very unusual," acknowledges Michael Kossman, who served as COO at Kochis Fitz for eight years and is now CFO of Aspiriant. "But we didn't think there were going to be any particular points of contention."
The two firms also had their differences-enough so to make things interesting as the merger proceeded. Kochis Fitz specialized in serving Fortune 500 corporate executives with between $5 million and $30 million in liquid assets who tended to pursue an asset growth investment strategy. The firm had an expertise in corporate compensation and was known for its innovative strategies in the area of stock options.
Quintile, by comparison, offered family office services to a richer clientele that was more interested in asset preservation and issues related to multi-generational wealth transfers. Its average client before the merger had about $40 million in investable assets and depended on Quintile for expert advice on tax and estate planning and philanthropy issues.
The two firms had some overlap in the $10 million to $15 million client asset range, Kochis says, adding, "They skewed on the high end and we skewed toward the low end."
As the merger has proceeded-firm officials say the two offices won't be completely integrated for another 18 months-these differences have been viewed as more of a benefit than a hindrance. Fitz noted that some clients of the Kochis Fitz office have already been introduced to Quintile advisors knowledgeable about the complexities of forming entities for charitable planning and about tax planning.
In addition to its expertise in executive compensation issues, Kochis Fitz has given the Los Angeles office access to partnership investments in global real estate, commodities and private equity. Quintile, meanwhile, brought San Francisco new innovations in fixed-income investing, including a recently launched municipal bond fund.
"Quintile can teach us to provide that expanded service to the higher end clientele who want it and are willing to pay for it," says Kossman. "We can teach Los Angeles how to provide a lesser scope of service to the $5 million to $10 million market and do it efficiently."
The investment teams of both firms have merged into one committee and Kochis says he expects any changes in investment philosophy to be subtle, "nothing terribly dramatic." Any changes that do occur, he adds, will likely be in the new firm's approach to risk management. Kochis Fitz clients, generally younger and less wealthy than Quintile customers, generally took on more risk in their investments.
Kochis and Francais also noted that, even without the merger, the predecessor firms were periodically shifting strategies. Kochis Fitz, for example, moved all its clients out of absolute return hedge funds in the past two years after concluding that the costs, illiquidity and return expectations were no longer beneficial. A portion of Quintile's clientele, however, remains invested in hedge funds. How these portfolios are handled will be determined after a review Aspiriant is conducting of all its capital market exposures, according to Kochis and Francais. "We expect most portfolios to migrate to the firm's best thinking, just as if we were a firm that didn't do a merger," Francais says.
The merger was also equal in terms of the breakdown of shareholders. Seventeen of the principals are from the San Francisco office and 15 are from Los Angeles. As part of the merger, 14 original partners sold their shares to 18 new ones to make 32.
The weight of ownership varies according to the tenure and experience of each stakeholder, according to the principals. But most of the firm is owned by eight people. Kochis owned 27% of Kochis Fitz, and after selling his shares he is now the single-largest shareholder of Aspiriant with 13.3% of the firm's shares.
There is, however, a built-in device in the structure that's designed to even out ownership over time. Kochis explained that whenever shares are put up for sale by a principal, the first 25 shares sold are made available only to those who own less than 1% of the firm. The remaining 75% are offered to those who own less than 5%, including people in the first group. Any remaining shares are then offered to everyone. "Eventually, you get to the point where most people only have small ownership stakes," Kochis says.
Because of the large number of shareholders, Aspiriant has made a clear distinction between ownership and management. Shareholders elect a board of directors, and then virtually all decisions, including policies and the firm's overall strategic direction, are made by the board.
"We have a very large number of shareholders, and you can't put every decision to a vote of 30-plus people," he says. Another reason for this management structure is that it allows most of the company to concentrate on serving clients. "In order to be a shareholder, we don't require that you have any talent to manage," Kochis says.
Growth is Key
For the Aspiriant merger to work, Kochis acknowledges that the firm must sustain a healthy growth rate. It is growth that will increase the value of the firm's shares, and provide the impetus for talent to buy more shares, and for more partners to join the company.
Under a five-year plan approved by Aspiriant's board of directors, the goal is to triple assets under management to a total of $15 billion, with about $4 billion of the growth coming externally from outside advisors who join the firm. Although Aspiriant has inquiries from potential partners, Kochis and Francais say their firm will not start actively looking for more partners for another year to 18 months since the merger is not yet fully completed.
The plan also calls for annual net income growth of 20%, annual profit margins of 40%, a total of 120 employees and about 700 clients. The plan also assumes Aspiriant will be in four major national markets by 2012.
Marketing experts say that Aspiriant's success in expanding and meeting its growth projections will depend on how successful it is in defining its brand and distinguishing itself from its competitors.
Marie Swift of Impact Communications Inc. says the firm will need to present a concise message to avoid the "sameness" that characterizes the wealth management market.
"They need to be more clear than the average advisor serving the mass affluent," she says. "When you're going after a higher-net-worth client, you want a more precise message."
Aspiriant will need to forcefully define how it's different from a Merrill Lynch or Citicorp, says Libby Dubick of Dubick & Associates. "Part of what you're selling is a consistent experience everywhere," she says. "One of the challenges of the firm is to deliver that. Otherwise, what are you branding?"
There are more than a dozen committees still working on the merger, say the Aspiriant principals, and defining the policies and procedures for a consistent client experience is part of their ongoing work.
Yet even when Aspiriant defines its client service offering, don't expect to see the firm in a Super Bowl commercial. Kochis and Francais say their marketing will be targeted, both in terms of geography and audience. The key, they say, will be establishing a presence in major urban markets and then getting on the short list of investors and professionals in those areas.
"For our firm, like any wealth management firm, almost all new business comes from new referrals," Kochis says. "We don't expect that to change."
In its first year of existence, Aspiriant won't be meeting its performance targets. Part of the reason is bad timing. Serious negotiations for the merger started in spring of 2007, about the same time that the subprime mortgage market collapsed, setting off a volatile chain of events that continues to drag down the market. Economic conditions, as well as the cost of the merger, have put a squeeze on revenues and profit margin, says Tom Tracy, a principal who started with Kochis Fitz in 1992.