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Cambridge to take stakes in 23 advisory firm ‘partners’

Cambridge Investment Research Inc. will team up with 23 advisory firms in a new venture called Continuity Partners Group that will focus on succession planning and acquisition financing.

Cambridge, a broker-dealer with 1,600 financial advisers and $30 billion in assets, will sell stakes in the venture in exchange for 20% of each advisory firm’s annual earnings.

The advisory firms can then tap Continuity for loans to help buy other firms or for junior advisers to buy out senior advisers’ practices.

The broker-dealer was planning to announce the launching of the firm today, but because of an “unexpected legal complication,” it delayed the announcement.

Although other companies, known as roll-up firms, have consolidated investment advisory firms into one practice by buying them out — thus making the advisers employees of the parent firm — with Continuity, advisory firms will remain independent and in control of their businesses, said Cambridge chief executive Eric Schwartz.

“We don’t want controlling interests in these entities at all. Our view is that this is an enterprise that supports their independence and their success rather than us just buying them,” Mr. Schwartz said.

“This is more about helping them make money rather than cashing them out,” he said.

Here’s how the new firm will work: When an affiliated advisory firm wants to buy a practice, it can get a loan from the corporation at about 2 percentage points above the current prime interest rate. Firms can buy in by selling 20% of their practices for shares in Continuity.

“I don’t think there’s anything out there like this,” said Paul Lally, president and co-founder of investment-banking boutique Gladstone Associates LLC.

Mr. Lally said he believes that the new company will solve one of the biggest challenges for advisers — getting loans to acquire advisory firms.

“The underwriters in a bank don’t understand how financial transactions are done,” he said. “Here you’ve got a group of advisers acting as a due-diligence team. They’ve created a retention tool, a succession-planning tool and a financing vehicle all rolled into one.”

The venture is not without risk, however, noted Philip Palaveev, president of Fusion Advisor Network, an independent broker-dealer with $2 billion in assets. He said his firm has considered something similar.

“I think the idea is meaningful, and it will benefit the advisers associated with Cambridge,” Mr. Palaveev said. “But there’s a danger of pooling equity. You pull equity from your own practice, which you know and control, for equity in this joint company that you secretly suspect consists of worse people than you. That’s where some of the issues arise.”

Rick Watson, an adviser and owner of Eagle West Group, which manages $130 million in assets, has joined Continuity, despite initial reservations about giving up part ownership in his firm.

“It’s hard to let go of a piece of what you’re doing,” he said. “But on the other hand, we’re picking up 20% of someone else’s.”

Mr. Watson compares the deal to a deferred-compensation plan.

“It’s a diversification strategy,” he said. “I’m investing 20% of my profits in other advisory practices, which is a market I understand. Then, when I retire, I can sell the stock.”

Cambridge declined to disclose the names of the other 22 partner firms.

Mr. Watson’s current succession plan would be to instruct a trustee to sell off his practice in pieces — a strategy he finds distasteful.

Many advisers are seeking help with succession planning, said Steve Levitt, co-founder and managing director of Park Sutton Advisors LLC. “These small practices don’t have expertise in how to facilitate succession planning; there’s a huge need for help.”

Mr. Schwartz believes that this venture will succeed because the advisers are getting coached on succession planning while still operating independently.

Currently, Cambridge Management Group Inc., a wholly owned subsidiary of Cambridge, will own 18% of the firm, four members of Cambridge’s management team will own 60%, and advisers the remaining 22%. Mr. Schwartz owns about 99% of the management portion.

He projects that the group will have loaned out $200 million for acquisitions within the first 10 years, and by the end of the first decade, advisers will have majority ownership of the corporation.

Mr. Schwartz said that advisers will have seats on the board of directors as well as control of an appeals board.

“They can outvote the board and grant an adviser leniency [on a loan],” he said. “This is really about the advisers; this is all about strengthening individual firms, and not having them lose their identity.”

The new corporation is already in the midst of doing two deals. One adviser is buying a $1 million practice and is borrowing $400,000 from the corporation. The other deal is a succession plan in which the senior adviser wants to sell half of the practice to a junior partner. The junior partner is borrowing $400,000 from the corporation as well.

E-mail Lisa Shidler at [email protected].