The people who run Mercer Global Advisors Inc. use various analogies and descriptive terms to describe their acquisitive firm. The Denver-based registered investment advisor’s CEO calls the company an unfinished symphony. Its former chief executive, who now leads its expansive mergers and acquisitions efforts, likens it to the Mayo Clinic. The fund’s marketing material calls it a family office for real people.
The company has been making noise with its aggressive M&A pace—36 deals since 2016. After its most recent acquisition (or, at least, the most recent one before this story went to print in mid-October), Mercer Global Advisors had more than 40 locations across the U.S., 440 employees and more than 14,000 clients with $21 billion in client assets.
It’s one of the country’s largest independent RIAs, yet the executives at Mercer Global Advisors (henceforth referred to as Mercer Advisors, which is not to be confused with its parent entity, Mercer Advisors Inc.) sees plenty of upside ahead. “We’re a long way from done—we think of ourselves as an unfinished symphony,” says CEO Dave Welling.
Mercer Advisors plays in a crowded sandbox of consolidators gobbling up small to midsize RIA firms in a rapidly consolidating industry. While its asset base has zoomed about 250% since it began its acquisition spree in 2016, it appears to be roughly in the middle of the pack in terms of assets under management within the universe of large RIA acquirers. But even as Mercer Advisors aspires to get bigger, it says its M&A moves aren’t driven by a desire to be top dog on the RIA assets leaderboard.
“It’s not about how big we can get,” says Welling, 52. “We want a proper cadence to growth with a good mix of organic and inorganic growth.” The organic growth has come in part from its presence in referral programs involving Charles Schwab & Co., TD Ameritrade (now owned by Schwab), Fidelity Wealth Advisor Solutions and E*TRADE Securities LLC.
The company’s ultimate aim, Welling says, is providing its soup-to-nuts, family office-style service model—including fiduciary-based financial planning, investment management, estate planning, corporate trustee services, insurance solutions and tax planning—to as many retail clients as possible.
“We’re one of the first fee-only financial planning firms in the country,” Welling says. “We understand what that’s about, and people see it and that’s why [financial advisors contemplating a sale] are willing to talk with us.”
Evolution Of A Firm
Mercer has experienced several inflection points since it was founded as a one-man shop in 1985 by Kendrick Mercer, a lawyer in Oregon who moved to Santa Barbara, Calif., and opened a financial consulting and investment company called Mercer Advisors. Known to his friends as Rick, he sold the company to four employees in 1990 and moved on to other ventures. Now in his 80s and living in Idaho, Mercer is an author and consultant focused on human growth and human consciousness. But Mercer Advisors executives say his legacy lives on in the company’s focus on helping people realize their financial freedom by creating a plan that removes the economic worry from their lives.
For a handful of years during this century’s first decade, the firm focused on dental clients because the CEO at the time owned a dental practice consulting company and saw a synergy in combining that with financial planning and investment management for the roughly 1,500 dentists doing business with his firm. Mercer Advisors’ headquarters moved to Scottsdale, Ariz., during this period.
But that all changed when Dave Barton took over as CEO in 2007. Barton, who is 54 and now the firm’s vice chairman, joined Mercer Advisors as general counsel in 2000. As a practicing attorney in Santa Barbara, he originally worked for the law firm that represented Mercer. “I became their attorney and won a few cases. I think they got sick and tired of paying my legal fees and so they asked me to be their general counsel,” he jokes.
Barton became the fifth partner and company president in 2004. In late 2007, just before the onset of the Great Recession, he says the other partners wanted to leave and asked him to buy them out. “I said, ‘Guys, I’m the junior partner here and don’t have the money to buy you out, but I will find a partner to buy you out.’ That’s when I brought in private equity, and I became CEO at that time.”
These moves sent Mercer Advisors down the path to its current iteration. In 2008, private equity firm Lovell Minnick Partners bought out the original partner group and provided capital to support the firm’s expansion of wealth services.
“When I took over in 2008, I sold the dental business because that market is too small,” Barton says. “My vision for the company was to increase the value proposition. We had done financial planning since Day One, and I wanted to do more. I wanted to be a family office—I call it a limited family office. In 2011 I coined the phrase that we want to be the Mayo Clinic for financial care.”
The company moved its headquarters back to Santa Barbara and slowly built its service offerings by adding tax planning and preparation with a team of in-house CPAs, along with estate planning services with in-house attorneys.
And the client base grew—all of it organically. The firm reached $6 billion in assets before its first acquisition in the first quarter of 2016. In the prior year, private equity firm Genstar Capital bought out Lovell Minnick Partners and became Mercer Advisors’ new largest shareholder and source of growth capital.
The firm took an important step when it bought Houston-based Kanaly Trust Inc., a firm specializing in high-net-worth clients, via a stock merger in 2016. “They had a corporate trustee charter, which was big for us,” Barton explains. “That deal really cemented our family office business model.”
Kanaly was also a portfolio company of Lovell Minnick, which was brought back into the fold as a private equity sponsor of Mercer Advisors. With plenty of financial muscle to flex at that point, Barton began the firm’s active M&A pursuit of smaller RIA firms. It did three deals in 2016 and four in the first half of 2017.
“At that point, the board and I decided that M&A was going to be a huge part of our future,” Barton recalls. “I’m an attorney by trade, and I’m the natural guy. … I’m the modern architect of this business model. And who better to sell the company than me, and I could do the documents too because I’m the attorney and I could negotiate all of the deals because I’m the attorney. It was basically a turnkey package from a sales standpoint.”
So he stepped down as CEO in July 2017 and became vice chairman and head of M&A. That’s when Dave Welling came on board to run the company. Welling previously was a top executive at wealth management software firms Black Diamond, Advent Software Inc. and SS&C Technologies before he joined Mercer Advisors. Earlier, he worked with Schwab in various leadership roles in its advisor custody and 401(k) businesses.
Since he took over, Mercer Advisors has moved its headquarters to Denver and boosted its involvement in sustainable investing, pro bono financial planning efforts and diversity initiatives. The latter includes the InvestHERS program the firm launched two years ago to help attract more women into the financial services industry and better serve the financial planning needs of women.
Integrator Model
RIA firms are selling themselves to larger firms at a feverish pace, according to M&A consultants in the wealth management industry. Among the reasons: Founding partners are approaching retirement and seeking a succession plan; it’s getting more costly, complicated and time consuming to run an advisory practice; and wealth management is an attractive space that’s attracting a horde of potential suitors.
“It’s a seller’s market, because despite the pandemic we’ve seen very little interruption to the deal flow,” says Chris Browne, managing director in the asset management group at investment bank Piper Sandler.
A recent report by the bank detailed the RIA M&A landscape and classified acquirers into three models: The integrating model includes Mercer Advisors, Creative Planning, Mariner Wealth Advisors and certain independent brokerages like LPL Financial and Kestra Financial, among others. The multi-boutique model includes Focus Financial Partners and Hightower. The third model involves firms like Fiduciary Network that take minority stakes in an RIA to participate in the acquired company’s cash flow while leaving control in the hands of the seller and providing less support than those entities offering the other two models.
“If you are a seller who just wants liquidity with some strategic help or support, you’ll likely want to do that with a multi-boutique,” Browne says. “That’s because largely there’s no consolidation and little integration.
“But if you’re looking for liquidity for ownership but also want to join a larger firm, get support to grow your business and lock into potentially broader capabilities like distribution, and potentially a broader investment approach, you’ll likely lean toward an integrated buyer,” he continues. “But the flip side of the integrated buyer is you’ll be integrated over time and your brand will go away as you merge into the broader brand that’s acquiring you. That’s the trade-off. It depends on your objective as a seller and what your top priority is.”
Welling says RIA firms wanting to join Mercer Advisors are looking for a partner to help them grow, make them more efficient and productive, and handle back office chores so they can focus on client service. “The mechanism to get those outcomes is through integration so they can get the full benefit of our resources, scale and teams,” he notes, adding that it takes about a year to fully integrate an acquired firm.
“There are some things that happen faster,” he says. “You want cultural integration to happen right away. You want to move more slowly on investments integration—we’re not selling clients out of portfolios and causing tax consequences; we’re mapping portfolios in a carefully curated process to accomplish that.”
While none of the 36 acquired firms have filed for divorce from Mercer Advisors, the integration process hasn’t always been smooth. “Integration is difficult,” Barton says. “We’re an integrator, not an aggregator. So our model is all about change; it’s an exercise in change management. When I was still the CEO and doing M&A, I was wearing multiple hats and forced to move faster than I probably should have. I didn’t take the requisite amount of time to create that intellectual shared mindset with people. For example, I didn’t go into great detail into pointing out the various steps to integration, the time frame or the number of people who will be involved at each stage.
“Today, we’ve got a dedicated integration team where previously we had none,” he adds. “I’ve got a dedicated workbook. It’s called a road map, and it’s exactly that. From the day you sign the letter of intent all the way up through closing, it shows what happens during every step in between involving dates, who’s involved and how they’re involved, what’s your role in this process. I detail it out in writing, and have five pages of frequently asked questions on top of that. I take time to walk through the steps with the seller.”
Valuations
Mercer Advisors finds potential deals both externally and internally. In the former case, RIA firms either reach out directly or hire a banker such as FP Transitions or DeVoe & Company to find a seller for them, and they in turn contact Mercer Advisors. The company also has its own team of managing directors who do lead generation. “The majority of our business is the outside coming to us,” Barton says.
The three main things he looks for in a potential partner are a good cultural fit in investment philosophy, a belief in what Barton calls the power of financial planning, and an embrace of the fiduciary model.
"'Fiduciary’ means something to us, and it has since Rick Mercer founded the company,” Barton says. “He instilled those values from the very beginning. I ask for examples [from firms Mercer interviews] of how they put clients first. I want to know that they’re all about the client. I also want to know that they’re all about their staff, because how you treat other people tells me a lot about you.”
Assuming there’s a cultural fit, he moves onto financials. Barton employs three valuation methodologies to come up with a selling price: discounted cash flow analysis, a multiple of EBITDA and a multiple of top-line revenue. “The larger the AUM, the larger the revenue and the higher the multiples. I’m also looking for growth, and most firms aren’t growing,” Barton explains.
He says he does a deep dive into a firm’s client base by looking at its client retention numbers going back many years, how much money they’re managing for a particular client, client tenure, the geography of the client base, and the age demographic of clients to see if they’re in the accumulation or distribution phase. “I want to know where the clients are coming from and what a firm is doing to grow,” he says.
When it comes to the financials, “I literally sit down with the seller—now it’s done over a Zoom call—and go page by page over the P&Ls, the balance sheet and tax returns, and I really understand that business,” Barton explains. “And by knowing the revenue and the expenses, I know what the adjusted net income and EBITDA is. And we arrive at that number jointly with the seller so it’s no surprise because this is a live exercise, which they appreciate. Its ‘open kimono’ and I’m not hiding any cards.
“Together, we value the company,” he adds. “I say, ‘Based on all of this criteria, I think your company is worth 8.6 times adjusted EBITDA.’”
Of course, some sellers disagree with Barton’s computations. “But more times than not, I’m spot on because we’re arriving at those adjustments together,” he notes. “So if I’m off, I’m not off more than 10% plus or minus, so the adjustments are on the margin.”
Most of Mercer Advisors’ acquistions are all-cash deals, though some acquired RIAs roll a portion of the purchase consideration into Mercer stock. “We buy 100% of the stock or assets of the seller,” Barton says. “The seller doesn’t maintain a minority interest outside of owning Mercer stock.”
Exit Strategy
Mercer Advisors recapitalized in 2019 when private equity firm Oak Hill Capital bought a stake in the company from then-current private equity owners Genstar Capital and Lovell Minnick. Lovell Minnick cashed out its stake. Genstar remained on board after it sold out of its previous position and reinvested in Mercer Advisors from a new fund.
“For us, re-underwriting the Mercer team and platform, and restarting that clock to be a new five- to 10-year partner, gives us new capital to invest behind the company,” says Tony Salewski, managing director with Genstar Capital.
Oak Hill Capital managing partner Steven Puccinelli says his firm bought in because it believes Mercer Advisors is a well-managed platform that’s positioned to grow substantially as a consolidator of smaller fiduciary wealth management firms.
He adds Oak Hill was glad to have Genstar remain on board given its track record with Mercer. “We share the governance equally with Genstar,” Puccinelli says. “Since our involvement, we’ve hired a new head of human resources and a new CFO. We’ve added two independent directors who we believe will help us drive the business.”
Welling says Genstar and Oak Hill have equal, non-majority shares, with the remainder of the company owned by management and employees. He notes the company last year increased the percentage of employee ownership in a variety of ways.
As for Mercer Advisors’ ultimate exit strategy, Welling says all options are on the table. But for now, private equity ownership provides the capital needed for sustainable growth.
“I think companies lose their way when they set the destination of an IPO as their answer,” Welling states. “That’s not our goal. If an IPO is the best tactic to achieve liquidity and support the business, then we’ll evaluate that at the appropriate time. Our goal is much bigger than that, and its underpinning is the ability to serve our clients.”