HighTower’s pending acquisition of $6.4 billion in WealthTrust’s RIA assets from Lee Equity partners positions the Chicago-based consolidator of breakaway brokers as a serious player in the RIA consolidator space. For WealthTrust, the transaction represents the end of a two-decade long venture to consolidate RIA firms that left some participants disappointed.
Sources said that HighTower reportedly paid about $70 million for most of WealthTrust’s RIA operations and that, if the transaction enables it to slash costs of $3 million or $4 million and raise cash flow from the $5 million area to $9 million, the deal could be a winner for HighTower.
It remains to be seen whether the deal marks a shift in focus away from brokerages towards the RIA universe on HighTower’s part. Even before the Department of Labor proposed the fiduciary rule for retirement accounts, private equity firms reportedly had soured on the brokerage business due to slow growth and rising technology and compliance costs. And as any valuation expert knows, an RIA typically commands a higher multiple than a hybrid broker-RIA, partly because the former has a higher percentage of recurring revenues.
Few people understand this better than HighTower co-chairman David Pottruck, who served as COO and co-CEO of Charles Schwab during the 1990s when the RIA business exploded. Industry observers say the WealthTrust transaction had Pottruck’s footprints all over it.
Officials at HighTower have yet to divulge which WealthTrust they are buying and which ones they are leaving with the seller, Lee Equity. Sources said that HighTower will definitely buy WealthTrust’s three most profitable RIA firms -- Cleveland-based Fairport Asset Management; Kanawha Capital Management of Richmond, Va.; and Delta Asset Management of Memphis.
Fairport reportedly generates one-third of the group’s cash flow, while the other two firms account for almost another third. Some of the other WealthTrust firms reportedly are either marginally profitable or experiencing slow growth. Part of the problem is that some former owners who sold their equity no longer have incentives to grow. For HighTower, a major challenge could be re-energizing certain firms.
Motivating advisors who have cashed out is a challenge for most consolidators. Many, like WealthTrust, acquire majority interests in the firms they invest in. However, HighTower and others are finding ways to make sure their most productive firms share in the economics of the parent.
Lee Equity’s assets include many of the brokerage firms acquired by Sanders Morris Mundy, which was led for two decades by former Prudential Securities CEO George Ball. It is believed that Lee Equity is retaining the brokerage operations.
Lee Equity bought those assets, which included Edelman Financial Services, in 2013 for about $300 million. In 2015, Lee made a killing when they sold a majority interest in Edelman to Hellman Friedman valuing the firm at more than $600 million. Executives at Lee reportedly had ideas of merging Edelman’s firm with the others, but contract language and cultural issues rendered that option unfeasible. Edelman founder Ric Edelman declined comment.
In 1997 -- a decade before Focus Financial, United Capital, Fiduciary Network, Dynasty Partners, HighTower and others were launched -- Rush Benton conceived the idea of a national network of RIA firms. But by last year, three of the 12 firms acquired by WealthTrust had managed to buy themselves back, which was no easy feat. No one knows how many others wish they had the resources to do likewise.