The coming wave of M&A for advisory companies

Competitive pressures on smaller firms present opportunity for deal making

Oct 23, 2016 @ 12:01 am

By Christine Idzelis

If your firm is looking for acquisitions, it has plenty of company.

Forty-three percent of firms that participated in the 2016 InvestmentNews Financial Performance Study said they're planning to make an acquisition in the next two years.

The biennial study, which was sponsored by Pershing and conducted in partnership with Ensemble Practice, examined 222 independent broker-dealers, registered investment advisory firms and hybrid companies that use both business models.

Rising competitive pressures are feeding M&A ambitions. Larger firms see that it is becoming tougher for some smaller ones to keep up with the rising costs of compliance and technology, while at the same time devoting enough resources to their clients.

“They need to be able to offload the non-money-making activities,” Matt Cooper, president of Beacon Pointe Wealth Advisors, said in a phone interview.


The firm, based in Newport Beach, Calif., is the acquisition arm of Beacon Pointe Advisors, which provides institutional consulting and private wealth-management services. Beacon Pointe Wealth is targeting firms with $100 million to $500 million of assets that are looking for help in areas such as compliance, marketing and social media.

This month, the firm announced the purchase of Ironmark Advisors, a registered investment adviser with $340 million in assets under management. The acquisition increased Beacon Pointe Wealth's AUM to about $2 billion, while creating a hub in the Dallas area where Ironmark is located.

The InvestmentNews study found that so-called enterprise ensembles, or firms managing a median $1.1 billion of assets, have the most interest in deal-making, with 49% intending to make a purchase in the next two years. Super ensembles, or wealth managers with a median $2.1 billion of assets, were the second most inclined, with 47% saying they planned an acquisition.

Firms seeking to merge or make an acquisition in the next two years

Savant Capital Management, based in Rockford, Ill., is among the larger RIA firms surveying the fragmented wealth-management industry for deals.

The firm this month said it had lined up a number of investors to help fund acquisitions that would help it grow from $5 billion in assets to as large as $50 billion. The targets may be “tuck ins,” where Savant acquires firms with $100 million to $750 million in assets and merges the businesses with its existing offices, according to CEO Brent Brodeski. Savant also would be interested in buying practices with as much as $1.5 billion under management to enter new geographic markets, according to Mr. Brodeski.

(Related read: In the wake of the DOL fiduciary rule, will adviser M&A surge?)

Financial Development Systems, a broker affiliated with LPL Financial, has a deal in mind that will help it stand the test of heightening regulatory scrutiny.

The firm is planning to merge with Merit Financial Advisors to transition to a fee-based business, according to Greg Gerhard, Financial Development's chief financial officer and chief operating officer. Advisers are increasingly charging fees based on assets, rather than commissions from the sale of investment products, as regulators sound the alarm about conflicts of interest that eat away at investors' returns.

(Related read: The DOL fiduciary rule will forever change financial advice, and the industry has to adapt)

One of the forces accelerating the shift to a fee-based model is the Labor Department's fiduciary rule. The new regulation, which takes effect in April, will require financial advisers to demonstrate that they're acting in their clients' best interests when providing recommendations for their retirement accounts.


There are other regulatory pressures raising compliance concerns among advisers. The Securities and Exchange Commission has stepped up scrutiny of succession and business continuity planning in an effort to protect investors from the fallout of a natural disaster or sudden death of a wealth manager's founder. The watchdog has also increased its scrutiny of fees and business practiced through social media.

Percentage of firms valued by a third party in the past two years

A merger between Financial Development Systems and Merit, a hybrid RIA firm, is still a couple years away because of restrictions tied to a succession plan carried out at Financial Development after its founder suffered a debilitating stroke five years ago, according to Mr. Gerhard.

Terms of the succession plan may leave more time for courtship than the two firms had originally hoped, but it hasn't stalled steps being taken in preparation for a merger.

Financial Development met this month with FP Transitions, an acquisition management firm in Lake Oswego, Ore., to discuss valuation and possible ownership structures, according to Mr. Gerhard.

(Related read: Top reasons for independent advisers to consider a merger instead of an acquisition)

Acquisitions that strengthen organizational structures, improve technology and provide economies of scale can all be a plus in navigating an increasingly complex regulatory environment.

“You really need a lot more infrastructure and high-caliber, compliance-minded people,” Mr. Gerhard said.


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