Time was when independent financial advisors wanted to stay independent and that was that. Merger talk surfaced now and then but most top planners laughed at such a notion and went back to work. Independence had been hard won. Besides, getting a dozen planners to agree on how to work together was "like herding cats," says Tom Connelly, who left the firm he co-founded, Keats, Connelly & Associates Inc. in Phoenix, to work for himself because the firm was growing too large.
I can't put my finger on when the tide began to turn but my best guess is that it had something to do with Mark Hurley and his 1999 report on The Future of the Financial Advisory Business, in which he claimed that the business would enter a period of cutthroat competition, the successful firms would get bigger and bigger and the small fry would find growing their firms increasingly difficult. Plenty of advisors disagreed with Hurley at the time, arguing that financial planning was best done in an intimate setting where the chief planner met directly with clients. No bean counters allowed. But while I wasn't looking, it seems that they all changed their minds, including Judy Shine of Shine Investment Advisory Services in Denver, at one time the most adamant defender of the solo practice.
When I read that Shine's firm had been purchased by Western Alliance Bancorp based in Las Vegas, I realized that I might be the only one who missed the tipping point. Perhaps I was too enamored of the romantic notion of independent advisors meeting at their rustic retreats every summer on college campuses across the country and going up against the big guys. Reporters always cheer for the independents. But, as Shine says: "We're going to be seeing a lot more mergers this year." So I'm getting myself ready for the new news.
The part I missed was that the little guys won. Once the independent firms became so successful that they began to steal market share from the big banks and brokers, it was the big guys who gave up. Of course, they didn't announce it. But they quietly acknowledged that wealthy people want objective advice, and that they want to pay for advice rather than products. They acknowledged it by buying up financial advisory firms and allowing them to operate on their own rather than forcing them to sell bank or brokerage products.
At first, independent advisors were wary that the firms offering to buy them might try to cut corners. Like maybe they would push inferior products on the planners' clients. Or they might try to hamstring planners with their own conservative investment agenda. For example, one suitor who approached Shine a couple of years ago refused to buy emerging market stocks and limited international to just 10% of portfolios. Shine didn't have any trouble turning that deal down because she knew it was bad for clients.
In general, independents didn't want to go with a firm that had its own product to sell. That could get too dicey. The planner might be forced to tell the boss that his bank products are not good enough for the advisor's clients. So five years ago, everybody was wondering and talking about how and when to sell an independent firm and how to value it.
Then Harris Bank bought Sullivan, Bruyette, Speros and Blayney in McLean, Va., one of the top-ranked firms in the business. This deal answered the question about what was the best way for a bank to operate its new advisory acquisition: Let the advisors operate on their own. Greg Sullivan, SBSB president, said that SBSB would operate with open architecture. Everyone held his breath. Bankers insisted that SBSB sold bank products. Independents insisted that SBSB gave objective advice.
Shine, like many other advisors, had been skeptical that an advisory firm could operate independently after being taken over by a bank, but the SBSB merger changed her thinking and allowed her to seriously consider the possibility of such a merger for her own firm. "I'd been thinking about this before Greg did it," Shine says. "But when Greg did it, I started thinking more about it."
Shine says she once asked Sullivan what made him sell the firm. He told her that when he walked through the office he felt that he no longer knew all the employees well or even some of the clients. "I don't know what's going on behind closed doors anymore," he said. Shine understood his point.
And then Mark Hurley was back on the scene, setting up deals for top firms whereby the junior employees bought out the senior management, with Hurley's help. Hurley arranged deals for Evensky & Katz in Coral Gables, Fla., and RegentAtlantic Capital LLC in Chatham, N.J., and Brightworth in Atlanta, just for starters.
Shine said all of these mergers affected her decision. A lot. Especially when she saw Eleanor Blayney of SBSB and Deena Katz of Evensky & Katz, two women who had been in the business with her for 20 years, move on to other projects. Not that Shine hadn't had suitors before. Mark Hurley wanted to buy a piece of her firm. So did three large banks.
But the timing of her sale had to do with something else. Shine belongs to a study group in Denver called the Picasso Group, about 16 independent advisors who go up into the mountains a couple of times a year and talk about financial planning. In January 2007, the group invited two advisors who had merged with big firms to come to the meeting and talk about what was good about selling your firm.
One of the things they thought was that the value of advisory firms is topping out, and there are not that many suitors left. Shine compares it to musical chairs and she wanted a chair before they were all gone. "We tell our kids that there is someone for everyone," Shine says. "But it's not like that in business."
Shine says she learned a lot from her experience. "I don't think I changed my mind," she says. "I think I evolved with the times." No one ever thought the banks would do well in the independent financial advisory business, she says. But the banks (some of them) figured out what it took to succeed in this space.
Banks like Sun Trust, whose financial advisory subsidiary, GenSpring, operates with open architecture. Like Sun Trust, the other banks got the message. "It's not that the planners got smarter," Shine says. "The banks got smarter."
Shine's firm serves 200 families with $450 million under management and eight employees. She had a buy/sell agreement in place with another Denver planner whose business closely resembles hers, she said. But he has 150 clients of his own. She realized that he could not reasonably take over her 200 families if something happened to her.
She was also facing pressures in her business because her clients are aging. "As your clients get older, there are big issues and it is a huge toll on your time," she says. "And the liability is huge. It's like being an OB/GYN without insurance."
Like every business person, Shine needed a source of new clients. Referral sources had begun charging a fee, typically 15% for three years. Dennis Miller, a friend in Phoenix who sold his firm, Miller/Russell & Associates Inc., to Western Alliance Bancorp, called his new bank holding company, "a referral machine," and he watched assets under management go from $450 million to $1.7 billion in five years. Miller also provided Shine with an inside view of Western Alliance. The bank holding company owned eight banks in Arizona, Nevada and California, as well as a bank trust company and Miller's advisory firm in Phoenix. The banks offered no financial planning services. Clients who wanted financial planning were referred to Miller/Russell. Western Alliance also planned to open a bank in Colorado.
Shine calls Robert Sarver, CEO of Western Alliance, who also owns the Phoenix Suns basketball team, a "business maverick," and admires his plans to build a financial services business. "It wasn't my best deal financially," she says. "Not even close."
Shine likes the flexibility she has in the deal. "I still own 20% of my own firm," she says. Meanwhile, she doesn't have to worry about leaving clients in the lurch if something happens to her.
At least for the moment, however, regional banks are going to be less likely to pay cash for advisory firms until the banks themselves can see some light at the end of the subprime tunnel and staunch the bleeding on their cash reserves. And advisors probably will be less likely to accept equity in regional banks until their shares start to stabilize.
But even the subprime monsoon isn't going to quell all the merger conversations swirling through the advisory business.
Mary Rowland can be reached at [email protected]. She has been a business and personal finance journalist for 30 years, a half dozen of them as a weekly columnist for the Sunday New York Times. She wrote a column called "Practice Points" for Bloomberg Wealth Manager for six years. She speaks regularly about money and values. Her six books include two written for financial advisors.