Hub-Sheridan Road latest deal to heat up M&A among 401(k) advice firms

Some experts believe consolidation is just starting in this area of the advice market

Jan 10, 2019 @ 2:02 pm

By Greg Iacurci

Acquisitions of financial advisory firms focused on the retirement-plan market appear to be gaining momentum.

A handful of recent deals involving large 401(k)-focused firms and a more varied group of buyers have led some experts to believe that the previously subdued acquisition market is turning a corner.

The latest development is Hub International's acquisition of Sheridan Road Financial, a $14 billion firm headquartered in Chicago. InvestmentNewsreported in November that the two firms had been in talks over a deal, which was formally announced Wednesday. Terms weren't disclosed.

That follows on a blockbuster deal announced last April that saw private equity firm Hellman & Friedman pay about $3 billion for Financial Engines, a managed account provider for 401(k) plan participants. The PE firm combined Financial Engines with Edelman Financial Services, another of the country's largest registered investment advisers, to form Edelman Financial Engines.

"I think we're on the very, very front end of this," Troy Hammond, president and CEO of Pensionmark Financial Group, said of the consolidation trend.

"The Financial Engines and Sheridan Road transactions are of particular interest because we're starting to see outside money recognizing the fact that our businesses are undervalued and getting their toes in the water," he said.

Up until the Financial Engines deal, private-equity money was largely absent from 401(k) adviser market, experts said. And Hub, an insurance brokerage, is a relatively new entrant into the 401(k)-firm acquisition market. It joined the ranks of these so-called aggregators in 2017, when David Reich, formerly an LPL retirement executive, was hired as Hub's president of retirement services.

Captrust is the largest of the aggregators, with nearly $300 billion in assets. Hub Retirement Services, by comparison, has nearly $25 billion following its recent acquisition, Mr. Reich said.

"It used to be that scale was $1 billion, then $5 billion, then $10 billion," he said. "Now it's starting to be that $25 billion is probably the entry point, and some people argue $50 billion."

Dick Darian, CEO of The Wise Rhino Group, a consultant that advises on M&A, said Sheridan Road is among the "elite regional" firms, which typically have annual revenue ranging from $3 million to $15 million.

There are about 75 to 100 of these firms that are the coveted acquisition targets of aggregators, said Mr. Darian.

Some retirement plan advisers have turned toward aggregators to offload business responsibilities and help make their businesses more efficient in the face of declining fees and growing demand for services among plan-sponsor clients.

While the wealth management business is more mature in terms of M&A — think of it like the sixth inning of a baseball game — the retirement market is nascent, more like the first inning of a ball game, according to Mr. Darian. He believes the Sheridan Road deal is an indicator that the market could become more active.

"It's certainly a sign," he said. "It's a proof statement that the consolidation is game on."


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