Holding Companies Holding On
Remember when the growth of holding companies was one of the splashiest trends in the RIA space? Holding companies--otherwise known as consolidators, aggregators or roll-ups (most of them hate that term)--were among the most aggressive acquirers of sizable advisory firms as mergers-and-acquisitions involving RIAs zoomed prior to the market crash. Post-crash has been a different story.
The acquisition spree has slowed, some advisors have bought back their businesses, and a recent lawsuit alleging breach-of-contract filed by one of the partner firms at Focus Financial Partners, a leading holding company, raises questions whether these structures make sense for advisors.
"There's no black-and-white answer," says Daniel Seivert, CEO and managing partner at Echelon Partners in Manhattan Beach, Calif., an investment banking and consulting company. "There is a long list of advantages and disadvantages."
Off-the-record scuttlebutt from advisors tells tales of one-sided financial and legal terms at some holding companies and their private-equity backers that've rankled some advisory firms. "There are a lot of elements embedded into stock agreements that give rights to management teams and investors," Seivert says. "You have to be real careful about that."
Are advisors conducting enough research before selling a stake in their firms or are they too eager to get a big check? "I think there's a disconnect when some of these advisory firms look into these types of deals without the same level of scrutiny as they would buying securities for a client," says Brian Hamburger, managing director at MarketCounsel, a consulting firm in Englewood, N.J.
Holding companies typically offer cash and an equity stake to the principals of advisory firms, and ideally provide infrastructure support, technology or other needed services to help their affiliated firms grow. In return, firms sell a percentage of ongoing future cash flows to the buyers (or, in some cases, the entire business) at a higher multiple than possible from a legacy transaction or a sale to a comparably sized outfit. And some holding companies hold out the promise of an initial public offering or potential buyout by a larger financial institution as a possible exit strategy that could provide a huge payout to all parties involved.
But the track record for publicly held financial holding companies hasn't been great. Two primary examples--National Financial Partners and Boston Private Financial Holdings--both have share prices that recently traded in the single digits and were roughly 80% below their all-time highs from the middle of this decade. (Of course, most financial companies took it on the chin in recent years.)
But while the pace of acquisitions has cooled, things could be warming up again. "Sellers have been focused more on taking care of their business than they are in talking to guys like me," says Rusty Benton, CEO of WealthTrust LLC, a Nashville, Tenn.-based holding company with ten partner firms. "For buyers, it's been hard to put a value on a business in this kind of market. And financing was hard to come by during the credit crunch."
WealthTrust hasn't made any acquisitions since October 2008, but Benton says he intends to make more acquisitions. In mid-November, New York-based Focus added its first major advisory firm in roughly a year when it took a stake in Joel Isaacson & Co., a leading RIA firm in New York City with $3.5 billion in assets. Meanwhile, United Capital Financial Advisers in Newport Beach, Calif., remained active this year with four acquisitions, and it expects to make two more by second quarter 2010.
"There's a role for these entities in that they're helping advisors create economies of scale either as business-building partners or by providing needed liquidity," says Dan Inveen, a principal at the consulting firm FA Insight in Tacoma, Wash. "Long term, we'll continue to see these businesses as viable business propositions. In the short term, some people are going through some angst."
But there's a twist to this strategy. "One trend we're seeing is that RIAs have gotten bigger and more sophisticated to the point where they're doing deals on their own," Inveen says. "The Focus Financials and United Capitals of the world have competitors from RIAs making acquisitions."