M&A Talks Hit Many Roadblocks
More financial advisory firms are said be deep in merger discussions than ever before. But a confluence of factors are causing serious discussions to drag out even longer than usual. The obstacles to consummating deals include the ongoing paralysis in the credit markets, a weak equity market that is causing declines in RIAs' asset levels and doubts about the viability of some acquirers' exit strategies, such as their ability to go public.
The pace of mergers and acquisitions among registered investment advisors in 2008 is down from the torrid pace of the past two years, says a study by Pershing Advisor Solutions LLC and Moss Adams LLP. While this conflicts with other published reports that show a modest increase in deals completed, merger activity across all industries has become a tortuous process. "I expect there will be fewer transactions in 2008," says Mark Tibergien, CEO of Pershing Advisor Solutions.
According to the study, Real Deals 2008: Definitive Information On Mergers and Acquisitions for Advisors, the average number of annual deals during the past two years leaped 37%, to 48, over the 2000-2005 period. But the slower pace in 2008 is partly attributable to the credit crunch, Tibergien says.
Another factor is that increased market volatility translates into decreased revenue and earnings at advisory practices, which makes acquirers want to lower prices and gives sellers second thoughts. "Sellers are saying, 'I'll wait until we're back in an upswing to demonstrate higher value,'" Tibergien says.
And many potential sellers have different priorities now than worrying about deal transactions. "Financial advisors might be focused on dealing with clients during this period of market uncertainty," says Dan Inveen, senior research manager at Moss Adams.
Yet overall trends point to healthy M&A activity beyond this year. "These are still great businesses with double-digit-plus profit margins," Inveen says. "Nothing has happened to dampen the demand for financial advice."
The study says that 53% of RIAs either bought or considered buying another advisory firm during the past two years. The top reason for a sale or merger is to find a succession solution (37%). The next most common motivations are that they are looking for synergies with an acquirer (25%) or they want to cash out the equity value (17%).
The study says advisory firms will face growing pressure to enter into deals because of rising valuations, inexorable industry consolidation and staff development needs.
There are numerous options for sellers, although the deal climate has shifted from an emphasis on synergistic acquisitions during the 2000-2005 period to purchases by buyers who tend to be more passive and have only a financial interest in the acquired firm. As part of this shift, serial buyers (read: roll-up firms) have emerged as the leading player in the M&A market, accounting for one-third of all transactions during the past two years.
Tibergien believes it's still a seller's market, but sellers need to be mindful of several things, such as deal terms promising higher multiples that are contingent on acquired companies growing their business by a certain percentage of, say, 25% or something comparable. "The question you should ask yourself is why would I want to share that growth with someone else if I have to do that on my own," Tibergien says.
Another thing sellers need to consider is their own motivation for making a deal. Is it to achieve economies, or perhaps boost the firm's multiple if the acquirer goes public?
As for advisory firm valuations, Tibergien says the going rate is somewhere between six and ten times EBITDA, with the latter affixed to larger, superior practices. He adds that acquirers were once targeting firms with at least $1 billion in assets but have been going down-market to $500 million firms, and multiples have held steady for those firms. But now buyers are looking even further down the chain to make deals for $100 million firms.

Ameriprise Buys H&R Block's Advisor Business
H&R Block Inc. will bow out of the financial advice business with the announcement last month it will sell H&R Block Financial Advisors to Ameriprise Financial Inc. for $315 million in cash. The deal is subject to regulatory approvals, and the final purchase price might differ based on changes in the balance sheet and advisor retention. It's expected to close in four to six months.
Ameriprise gains H&R Block's 900 advisors working in 135 offices nationwide, representing 376,000 clients with $30 billion in assets. For Ameriprise, a Minneapolis-based company that was spun off from American Express in 2005, the deal is part of its strategy to expand its advisory business. Earlier in August, its independent broker-dealer unit, Securities America Inc. of Omaha, Neb., announced it bought Brecek & Young Advisors, Inc., a Folsom, Calif. company with more than 300 advisors and $1.3 billion in fee-based assets.
In addition, Ameriprise announced it will sponsor the Financial Planning Association's seventh annual Financial Planning Week in October. That's the first time the event will have a sponsor.
H&R Block's advisors will be Ameriprise-branded and are expected to bolster the company's presence in key growth markets such as Florida, Texas and California. The combined company will have roughly 13,000 advisors and $305 billion in assets.
H&R Block acquired its advisory business in 1999 when it bought discount broker Olde Financial Corp. for $850 million in cash in an effort to diversify operations beyond its signature tax-preparation work. Olde Financial brought some baggage to the table--the company and its principal owner were fined $7 million in 1998 for advertising and sales-practice abuses during the early 1990s. Now, H&R Block has decided to abandon the financial advisory space at an exit price well below its entry price.
"The securities brokerage business increasingly demands size and scale, and HRBFA simply did not have the size to be able to compete at the highest levels in the future," H&R Block Chairman Richard C. Breeden said in a statement. "This transaction will give the HRBFA financial advisors a dynamic parent company with a growing platform so that they can compete effectively and efficiently."
The sale of its advisory unit to Ameriprise is Kansas City, Mo.-based H&R Block's latest move to shed ancillary operations in order to focus on its core tax services business.

Morningstar Buys Developer Of dbCAMS+
Morningstar Inc., a leading independent investment research company, announced a definitive agreement to acquire Financial Computer Support Inc. (FCSI), a provider of practice management software for independent advisors since 1981. FCSI's flagship product, dbCAMS+, is a popular portfolio management system that lets advisors track and create client reports, along with managing contact information and billing. FCSI reportedly has more than 8,000 licensed users of dbCAMS+.
Morningstar plans to rebrand dbCAMS+ and incorporate it into its Morningstar Principia product line, the company's modular, CD-ROM-based investment planning suite for financial advisors. The program incorporates proprietary research, data and analysis with investment management and communications tools.
"Investment analytics and portfolio reporting go hand-in-hand," said Chris Boruff, president of Morningstar's advisor business. "By bringing these two popular software applications together in a single product suite, advisors will have powerful options for integrating investment data and analytics with client performance reports."
Although Morningstar has a portfolio management software application within its separate Eeb-based Advisor Workstation Office Edition system, the dbCAMS+ acquisition will significantly expand its capabilities and footprint in that market.

Securities America To Buy Brecek & Young
Securities America Inc., an Omaha, Neb.-based independent broker-dealer that's a subsidiary of Ameriprise Financial, announced in early August it signed a definitive agreement to buy Brecek & Young Advisors Inc., a full-service broker-dealer and RIA in Folsom, Calif. The terms of the deal weren't disclosed.
Brecek & Young has more than 300 advisors with roughly $42 million in gross revenue and more than $1.3 billion in fee-based assets. With Brecek & Young expected to join the fold by late 2008, the bulked-up Securities America would have roughly 2,000 independent advisors, about $550 million in revenue and $15 billion in assets under management. The deal is awaiting regulatory approval.
"What Securities America was particularly interested in is our work in the area of retirement planning," says Chris Ranney, Brecek & Young's president and CEO. The company was started in 1992 by Roland Brecek and Hal Young, a couple of educators who worked with 403(b) plans on the side. This eventually became more lucrative than their day jobs, so they left the education field and started their own financial services company. They bought a securities firm in Cincinnati in 2001 and expanded their retirement market niche to include 401(k) and 457 plans.
Since 2004, Brecek & Young has been a wholly owned subsidiary of Security Benefit Corp. "Security Benefit refocused on its core competencies and decided it was in the best interest for all parties to find a new owner for Brecek & Young," Ranney says.
An investment banker representing Security Benefit contacted Securities America about Brecek & Young. Steve McWhorter, Securities America chairman and CEO, says that as talks progressed, it was evident Brecek & Young was a good match both for his company's culture and growth strategy.
He says, furthermore, that the deal gives Securities America's existing advisors access to Iron Point Capital Management, Brecek & Young's internal fee-based asset management system. In return, Securities America will lend its new affiliate various practice management tools, marketing support and its own wealth management programs.

Raymond James Tops List For Investor Satisfaction
Raymond James ranked highest in investor satisfaction among full-service investment firms, according to an annual survey released in August by J.D. Power and Associates. The company topped the list with a score of 831 out of a possible 1,000 in a study that measured six factors: investment performance; financial advisor/broker relationships; commissions and fees; account setup/account offerings; convenience; and account statements.
Based in St. Petersburg, Fla., Raymond James has 4,750 financial advisors serving 1.6 million accounts.
Edward Jones finished second among the 12 companies ranked with a score of 806, followed by UBS Financial Services with 798.
Raymond James rated "among the best" in all six categories, as well as in the "overall experience" category. The firms that rated "better than most" in the overall experience category are Edward Jones, UBS, LPL Financial Services and Merrill Lynch.
The other firms included in the ranking are Ameriprise Financial Services, Charles Schwab & Co., Chase Investment Services, Fidelity Investments, Morgan Stanley, Smith Barney and Wachovia Securities.
The study found that current unsettled market and economic conditions have caused investors to rethink what factors are most important in determining overall satisfaction: 24% of clients chose investment performance as the top factor versus 19% last year, while client relationships with advisors and brokers came in second among factors at 22%, down from 24% last year. These two categories generally place in the top two.
J.D. Power's 2008 Full Service Investor Satisfaction Study measured investment satisfaction among three different client groups: affluent investors (those with $1 million or more in investable assets); mass affluent investors (with between $100,000 and $999,999 in investable assets); and mass-market investors (who have less than $100,000 in investable assets).
The study is based on responses from 4,528 investors who primarily invest with one of the 19 firms included in the study (only 12 had enough responses to qualify for ranking).

Three Broker-Dealers Join 10,000-Advisors Club
The number of broker-dealers employing more than 10,000 financial advisors jumped from five to eight during 2007, according to Cerulli Associates' annual survey of the top 25 broker-dealers in the U.S. The three latest firms to hit that mark were LPL Financial, AIG Advisor Group and Edward Jones, and their growth is notable considering Cerulli's findings that the number of brokers and advisors in the marketplace is shrinking. "The industry isn't doing a good job in attracting new advisors," says Cerulli analyst Bing Waldert.
Broker-dealers generally grow in one of three ways: by recruiting new advisors to the industry, by recruiting experienced advisors from other broker-dealers or by acquiring another broker-dealer and its advisors. "What struck me is all three [broker-dealers] got there [to 10,000] in fairly different ways," Waldert says.
Of the three, LPL expanded the fastest, growing at a rate of roughly 70% last year to reach 11,000 advisors. The company acquired more than 3,000 of these through its purchases of three independent broker-dealers from Pacific Life and another 1,500 advisors from two bank third-party marketers-Uvest and IFMG.
AIG increased its advisory ranks from fewer than 9,000 advisors to more than 10,000 by acquiring three small broker-dealers. It also recruited roughly 250 existing advisors in 2007 through one of its broker-dealer units, FSC Securities, and each of its other four affiliated broker-dealers recruited a smaller numbers of experienced advisors.
Edward Jones grew the least of the three, adding only about 800 new brokers to reach a total of 10,500. Waldert says Edward Jones has one of the more unique business models in the industry with its focus on recruiting new advisors to the profession and establishing them in small, single-advisor offices. "Edward Jones is one of the few firms successfully hiring and training new advisors, with the exception of a handful of insurance broker-dealers," he says.
Waldert says all three broker-dealer growth options have challenges. Broker-dealers have struggled to retain the advisors of the acquired firms, and the competition for experienced advisors is tough.

Morningstar Expands Fund Categories
In a nod to the proliferation of exotic fund options, Morningstar Inc. has added two new fund categories and one broad asset class to its mutual funds classification system. The Chicago-based investment research company added a global real estate category for funds that are focused on real estate securities, convertible securities and real estate investment trusts and in which at least 40% of the holdings are in non-U.S. securities. As of June 30, there were 45 mutual funds and 11 exchange-traded funds in this category, which is part of the overall asset class of international stock funds. The second new category--currency--comprises eight mutual funds and 26 ETFs that invest in U.S. and foreign currencies via short-term money market instruments; through derivative instruments including--but not limited to--forward currency contracts, index swaps and options; and through cash deposits. And in addition to its existing five broad asset classes--U.S. stocks, international stocks, taxable bonds, municipal bonds and "balanced" portfolios-Morningstar added an "alternative" class that includes the currency, long-short, precious metals and bear market categories.
Morningstar also eliminated the muni Florida category in the municipal bond asset class because many of the funds in this category were liquidated or have merged with other funds. The remaining funds in that category will be included in one of the muni single-state categories (long, intermediate or short).