With the help of key executives at City National and the executive team at Pathstone Federal Street, a transaction was crafted with both the talent and the clients in mind, with the deal establishing an evergreen referral relationship between the bank and the advisory. City National wanted to retain the ability to partner with a family office as an option for its biggest, most sophisticated clients, which is the way it had used Convergent since acquiring it in 2007.
“A lift-out of the Convergent advisory team and the clients” is how Elmes describes the move to Pathstone Federal Street in late ’16. It brought $4.4 billion in assets under advisement, plus 30 people in three offices (Potomac, Md.; Los Angeles; and Portland, Ore.) and created nine new Pathstone Federal Street partners. Elmes became Pathstone’s executive managing director, with responsibility for growth.
In transactional terms, the deal was structured as an asset sale, trade publications reported at the time, so that Pathstone Federal Street wouldn’t assume any liability stemming from the Zier case. Indeed, on December 19 the U.S. Commodity Futures Trading Commission levied an $800,000 fine against the remnants of Convergent.
More To It
Sharing equity may have solved some problems, but it wasn’t the firms’ only reason for uniting. Each one’s strengths satisfied the other’s needs.
For instance, Federal Street sought a partner that was technology-savvy, which Pathstone Family Office was. Pathstone wanted to further enhance its investment program; Federal Street excelled at manager research and had expertise in impact investing, a growth area for advisors. (See sidebar.)
Pathstone also needed more professionals. It was growing, after all. Fleissig says, “We needed that next generation of advisors to join us to keep that multigenerational promise to our clients. As we met the advisors of Federal Street, we were like, ‘Wow.’ You couldn’t have found people like John [LaPann] had if you were trying to hire 10 or 12 advisors one by one.”
In conjunction with growing, Pathstone wanted to strengthen its C-suite. Elmes and LaPann certainly bolster those ranks. They, in turn, saw benefits for their clients in Pathstone’s bountiful suite of family-office services, everything from family-governance meetings to handling aircraft acquisition, with bill paying, property management, background checks on dog walkers and just about anything else a client can imagine in between.
The Touchstone To Merging and Beyond
Ultimately what enabled the firms to come together is the intangible that is so often mentioned as essential to a business combination: culture. They sensed a similarity.
LaPann observes, “What’s really made Federal Street’s merger with Pathstone and the acquisition of Convergent work is that the cultures are aligned. Everybody at Pathstone Federal Street, no matter how they got here, is committed to putting the clients first and foremost, to doing really high-quality work and to building a single firm that benefits both them and the clients. For advisors who are thinking about combining, it’s got to be about culture first.”
Elmes’ experience includes a ringside seat to what can happen when cultural fit is lacking. “What if you bought a practice that you wanted to integrate into your firm to create a great brand, and the leaders of that firm didn’t agree with some of the things you were doing—your model portfolios, your market views, how you’re executing? Then every day the leaders are trying to convince this other leader to do what they want. It is an enormous waste of time when instead, if you’re aligned, it’s, ‘All hands on deck, get to work and build,’” Elmes says.
Still, finding a soul mate doesn’t mean things will be the same after the union is consummated. To ensure from the get-go a common culture, Fleissig, who is responsible for the firm’s day-to-day operations, did a lot of work before the firms formally tied the knot.
“The house has to be built before you close” the transaction, Fleissig says. “Mapping out operations to understand where things are, finding the best practices and quickly getting to adoption of those practices throughout the firm, getting people on the same systems, and not having businesses inside of businesses are very important so that on the day you close, you have the culture of the one firm.”
As Pathstone Federal Street moves forward, maintaining the culture is woven into Elmes’ game plan for growth. “You have to grow in a way that doesn’t adjust your culture. You want opportunities that line up with what your firm does well and what your talent wants to spend their time on. If they really want to work on the sophisticated families with comprehensive needs, then you don’t want to have them work on narrow and small assignments,” Elmes says.
The seven-office advisory firm finished 2016 with $12 billion in assets under advisement. It’s too soon, perhaps, to assess success at the recently reconfigured organization. On paper it certainly looks poised to contend in the increasingly competitive private-wealth marketplace.
“We bring to it a lot of people with great understanding of the industry, the clients and the business,” LaPann says proudly of his new, bigger organization. “We have half a dozen people who have been either presidents or CEOs of firms.”