Deal Activity Picks Up
Financial advisory firmsZ seeking the best price for their practice might want to look outward rather than inward. According to FP Transitions, a Portland, Ore., outfit that helps advisors sell their businesses, the average open-market sales price last year was $670,000. That was slightly better than private sales between two separate practice owners and significantly more than private deals between employers and employees.
FP Transitions, whose primary market is small-cap firms selling for less than $5 million, states in its 2007 report that sellers are increasingly sophisticated about succession planning and understanding the value of the equity in their practice, and are casting wider nets and sorting through numerous offers before selling their practices. But not everyone wants to sell to the highest bidder.
"Most advisors see the equity in their firms as a legacy to be handed over with care," says David Grau Jr., FP Transitions' corporate program director. "They want to sell it to key employees. Maybe half would consider an open-market sale because they want the best financial advisor in the country that fits best with their clients."
As firms get larger, it's increasingly difficult to sell them to internal staff. "When an RIA gets bigger than $300 million AUM, it could be worth $5 million to $8 million," says David DeVoe, director of mergers and acquisitions for the strategic-client group at Schwab Institutional in San Francisco. "It gets almost impossible for junior folks to buy into the organization, so senior partners start selling minority, majority or full ownership stakes to holding companies or other companies."
DeVoe says he has tracked 37 deals among major RIA firms involving external acquirers in the first five months of 2007 and expects 70 to 80 deals this year, up from 58 last year.
Which ever route they take, Grau says the firms that contact his company looking to possibly sell their practice have done more succession planning than in the past. "People care about their equity and are taking their independent business model very seriously."

St. Louis A Financial Hub?
When Wachovia Corp. recently bought St. Louis-based brokerage firm AG Edwards for $6.6 billion and decided to base the combined brokerage operation in St. Louis, it further cemented the Gateway City's standing as a financial powerhouse.
The city is home to the brokerage company Edward Jones, the growing financial services company Stifel Financial Corp. and Buckingham Family of Financial Services (bought earlier this year by Focus Financial Partners). St. Louis also is headquarters for Scottrade, a large chunk of the operational and administrative centers for Reuters Group, and Savvis, a leading provider of IT services to the financial industry.
"There's a lot of financial infrastructure growing up around St. Louis," says Aite Group analyst Adam Honoré, "and it's really organic."
Wachovia's combined brokerage unit will be called Wachovia Securities, and while it leaves AG Edwards' existing operations intact rather than necessarily adding to it, it symbolizes the city's growing importance as a finance center.
"The West has a certain mentality when it comes to reaching deeper into this market, and what AG Edwards did really well was to represent small-town America," says Honoré.

Assets Getting
Stale In Old Accounts
A large proportion of affluent Americans have assets in old retirement plans instead of invested in active accounts, presenting financial planners with a golden opportunity to help these individuals make a productive change, according to a recent survey by Cogent Research LLC, a Cambridge, Mass., research firm.
Seventy six percent of people are part of an employer-sponsored retirement plan; of these, 44% have money sitting in a retirement plan maintained by a former employer. That percentage rises to 53% among people with investable assets exceeding $5 million. "The fact that so many high-net-worth Americans are leaving assets in a plan of a former employer demonstrates that many investors have not been offered a sufficiently compelling rationale for moving these assets," says Chris Brown, managing director of the Financial Services Practice for Cogent.
The Cogent Investor Brandscape: 2007 report surveyed 4,000 adults with at least $100,000. If found that the average amount of assets invested in plans of former employers is $259,521, or on average 28% of an affluent American's investment portfolio.
As might be expected, a larger proportion of younger investors are investing in high-risk assets compared with older investors. Middle age investors (ages 43 to 51) are the most likely to want a financial plan but not to have taken any action to prepare one.

Ibbotson Patents Portfolio
Concept Tied To Human Capital  
Ibbotson Associates, a registered investment advisor and wholly owned subsidiary of investment research company Morningstar Inc., has received a patent from the U.S. Patent Office on its portfolio creation technique for individual investors based on the concept of human capital.
Ibbotson uses this method to construct portfolios for many of the largest mutual fund and insurance companies, as well as individual investors in its defined contribution advice and managed account programs. Ibbotson received the patent in July, and it was the second it got for its asset allocation techniques.
The method provides a model for portfolio construction based on balancing an investor's financial capital and human capital. Financial capital is defined as an investor's current savings, such as money already saved in a retirement account. Human capital is an investor's future potential savings, and is often the single largest asset an investor has.
Typically, human capital is a bond-like asset-as with regular interest payments from a bond, workers earn a weekly salary from which they accumulate savings. Younger investors have far more of this bond-like human capital than older investors because they have a long time horizon to earn and save. So to balance out that large allocation to human capital, for example, younger investors should hold their financial capital in more aggressive investments. Older investors, on the other hand, have less human capital and should guard their financial capital with a larger concentration in conservative investments.
The invention is a method for automatically establishing an investor's portfolio mix by taking into account the investor's human capital, financial capital, age, savings rate and risk profile. It was developed by Peng Chen, Ph.D., CFA, president and chief investment officer of Ibbotson Associates; Roger Ibbotson, Ph.D., founder of Ibbotson Associates and professor of finance at Yale School of Management; and Mike Henkel, former president of Ibbotson Associates.
"Andre Agassi and I are the same age and we may even have the same risk tolerance, but that doesn't necessarily mean we should have the same asset allocation," Chen says. "An investor's tolerance for risk and age should not be the only factors that determine asset allocation in a portfolio. One's current financial situation and future earning ability-financial capital and human capital, respectively-play a large role."
Ibbotson Associates, founded by Ibbotson in 1977, creates asset allocation models for many of the largest companies in the finance and investment industries. Morningstar acquired Ibbotson in March 2006, and made it part of its institutional business segment.