To say many of the banks have gotten great deals might be an overstatement. Each individual case is different, and if a parent bank provides a large and steady stream of referrals and new business, the post-acquisition growth some bank-owned RIAs have enjoyed might not have been replicated if they had remained independent. But as Schwab Institutional's DeVoe explains, deal activity from regional banks has slowed noticeably and many top bank managements' attention is focused on survival for the moment.
The proliferation of holding companies seeking to buy advisory firms ultimately is beneficial for the business, DeVoe says, because it creates more options for firms to consider. "Having competition has been good for us," NFP's Holtz says, because it increases advisor awareness of their choices.
Firms like United Capital in Newport Beach, Calif., and Mesa in Minneapolis are focusing on firms with assets in the $100 million to $500 million range, while Wealth Trust and Fiduciary Network are looking at firms with over $500 million. "More specialization among holding companies will help create value," DeVoe predicts. "Several of the holding companies are doing a lot of the right things. They don't tell advisors how to run their businesses and enable junior people to buy into the business which they couldn't do otherwise."
Fiduciary Network CEO Mark Hurley maintains his firm, which has done four deals in the last year, is still willing to pay high single-digit multiples, and he argues the wobbly stock market is good for the high-end, fee-only firms he is targeting. He bases that statement on the examination of the 2002 results of over 50 firms he has talked with.
"Among 50 firms, I have not found a firm where net revenues did not go up in 2002 because they were so busy adding new clients," Hurley declares. "These firms are diversified value investors, and even if the average portfolio was down 6% new assets [made the top line] positive. So 2003 was a spectacular year for them. Their worst year was 1999, a bad year for value investors." His first two acquisitions, Regent Atlantic and Evensky & Katz, both experienced revenue growth of 25% or higher in 2007.
Fiduciary Network initially buys only 8% or 9% of a firm's equity and makes sure the younger partners have plenty of skin in the game so they have incentives to grow the business. Over time, the holding company may increase its stake.
Practically every acquirer from NFP to United Capital to Fiduciary Network will tell you they offer transition and succession planning opportunities, not exit strategies. Only one big firm, which shall remain nameless, offers RIA principals two times revenues and typically shuts the firm down and lays off all employees three months after the deal is completed. That's probably the quickest exit strategy out there.
Academic studies of mergers and acquisitions among large public companies frequently conclude that most are failures. So far the record for financial advisory businesses looks somewhat better. Part of the reason is that the deals take six months or more of negotiations, which often fall through. Fiduciary Network's experience of talking with 50 firms, negotiating with more than 20, and closing four or five deals illustrates this. With no pressing need to sell, Fiduciary Network's deals took more than a year to negotiate, but acquirees emerged with high comfort levels.
NFP's record in this area is illuminating. Prior to 2008, the firm completed 249 deals, of which 35 were sub-acquisitions where an NFP-affiliated firm bought another firm or a block of business, Holtz says. Additionally, there have been seven internal consolidations, largely takeovers, mergers or succession transactions. Indeed, more holding companies are encouraging successful affiliates to entertain sub-acquisitions.
Only 21 of NFP's 249 transactions, or 8.4% of the total, have resulted in what Holtz calls "dispositions," where a firm typically is sold back to the principals or folded. In these cases, "we have parted ways. Typically, it's sold back," he explains.
If the failure rate is relatively low at NFP, throughout the industry the success rate probably varies widely, with some deals far more successful than others. Holtz calls "succession planning a process, not an event," and maintains a group of staffers who focus on this. "Our deal doesn't work for someone who wants to get out quickly," he says, but "people in their mid-forties aren't looking at a five-year exit."
From his perch at Schwab Institutional, DeVoe believes most acquirers prefer principals to plan a phased exit over at least five years. "When the principals at a large organization are seeking to leave in six to nine months, it's not very attractive [to acquirers]," he says. But that doesn't mean principals have to keep working 60-hour weeks.