First Republic Bank buys Luminous Capital

Luminous Capital Holdings LLC, a fast-growing registered investment advisory firm based in Los Angeles, sold itself to San Francisco-based First Republic Bank on Friday in a major deal in the wealth management industry.

“Luminous Capital clients will have full access to the substantial resources and capabilities of First Republic, one of the strongest and most client-centric private banks in the United States,” Luminous Capital chief executive Eric Harrison said in a statement.

Added Jim Herbert, chief executive of First Republic: “Luminous Capital is an opportunity to acquire a highly successful wealth management firm with the same commitment to extraordinary client service as First Republic.”

The deal gives First Republic a much bigger presence in the California wealth management market — particularly with high- net-worth investors. “First Republic is buying a growth engine and none of the Luminous principals are planning to retire,” said David DeVoe, managing principal of M&A consulting firm DeVoe & Co.

Launched by former Merrill Lynch advisers Mark Sear and David Hou in the middle of the financial crisis, Luminous has been an RIA juggernaut. The firm’s assets under management have grown from approximately $1.7 billion in mid-2008 to $5.5 billion as of Sept. 30. Luminous currently ranks as the 17th largest RIA in the InvestmentNews RIA Data Center.

The departure and success of the two former Merrill advisers attracted a lot of attention in the wirehouse world.

“They were pioneers of the breakaway broker movement,” said executive recruiter Danny Sarch, founder of Leitner Sarch Consultants Ltd. “They were a mega-team, and it was big deal when they left Merrill.”

It’s also a big deal that they managed to sell their firm less than five years after leaving Merrill. The deal was all cash, according to First Republic’s press release, and the six Luminous partners all signed “long-term employment contracts as part of the transaction.” The combined firms will manage $29 billion in assets. No other details of the deal were disclosed.

While Luminous is selling itself to a bank soon after gaining its independence, the complementary geographic footprints and skill sets of the two businesses are a good fit, said Elizabeth Nesvold, managing partner of Silver Lane Advisors LLC, which advised First Republic on the deal. “It’s always a little scary for advisers to sell to a bank, but this is not a typical bank. First Republic found its way to independence as well,” said Ms. Nesvold. “They have a common vision of where they want to take the business.”

First Republic gained its independence from Merrill Lynch in 2009 — about a year after the latter was acquired by Bank of America — as executives executed a leveraged buyout with the help of private-equity investors.

The market for advisory firms has been strong for the last 18 months, said Ms. Nesvold. And given the possibility of a hike in the capital gains tax rate next year, there could be more deals to come in the next two months. “We never counsel clients to do deals for tax reasons alone, but if the transaction is in queue, it’s better to do it at a 15% rate rather than at who knows what next year,” she said.