John Egan’s business is helping people plan for retirement. So it was logical he’d make moves to prepare for his own.

Egan struck a deal in 2016 to sell a majority of his firm to HighTower Advisors, a private equity-backed aggregator of registered investment advisors who collectively oversee more than $70 billion.

HighTower now manages back-office arrangements for Egan’s Madison, New Jersey, office while he spends more time recruiting clients and works out with a personal trainer. Since the deal, Egan’s assets under management have soared 50% to $475 million and he’s lost 15 pounds. He said he also hangs out more at home in the 15 hours a week HighTower has freed up.

“My wife said she wished it was only eight hours,” said Egan, 59.

Egan’s new life is part of a consolidation sweeping the wealth-advice industry, a trend largely driven by companies funded by private equity, like HighTower. Advisors managing $2.4 trillion are expected to sell, merge or open shop over the next 10 years, according to market researcher Cerulli Associates. Two-thirds of the deals will be driven by firm founders preparing for retirement, Cerulli said. Others are seeking capital for growth or startups. The debt frequently used to make the purchases is one reason some advisors are reluctant to sell.

Registered investment advisors, a $4.8 trillion industry, have averaged 10% compound annual growth in assets for the last five years, according to Cerulli. The 10 largest aggregators are growing at more than twice that pace. Their fees, typically 1% of assets under management, have remained steady even as mutual funds and brokerages keep cutting theirs.

Record Deals
At least 85 firms traded hands in 2019, trailing only the record 92 transactions in 2018, according to data compiled by Bloomberg. Seven more deals were announced in the first week of 2020. Valuations also are at all-time highs, especially for sellers like Egan who agree to stick around and work to grow their businesses.

“In the last three to five years, you’ve see these super-regional firms with multiple offices finding leverage and momentum,” said John Langston, managing director of Republic Capital Partners, a Houston-based investment bank specializing in wealth-manager deals. “They have every advantage over their smaller competitors in size and scale.”

The wheeling and dealing may not last. Bank-based wealth managers, from whom many independent advisors split, aren’t standing still against the competition. Bear markets and industry disruptors from discount robo advisers to retail giants like Vanguard Group and Charles Schwab Corp. could change the value proposition.

Untested Models
“These consolidator models are relatively untested in a market downturn or even a more turbulent market,” said Marina Shtyrkov, a research analyst with Boston-based Cerulli.

Six out of the 10 largest consolidators of registered investment advisors have received external funding from private equity investors or venture capital firms, according to Cerulli. Other investors include banks, such as Goldman Sachs Group Inc., which spent $750 million for United Capital last year, and asset managers like Franklin Resources Inc., which said this month it would buy Athena Capital Advisors.

Advisor acquisitions, like most private equity transactions, rely heavily on leveraged-debt financing. HighTower was recapitalized and pledged $100 million for new strategic investments under a 2017 agreement with Thomas H. Lee Partners, a Boston-based private equity firm. HighTower currently has $430 million in debt due in January 2025, according to the company.

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