Fidelity custody business hooks up with lender to finance RIAs

The custodian's RIA clients will get discounted origination fees as part of the alliance with Merchant Investment Management

Fidelity Clearing & Custody Solutions has entered into a “strategic alliance” with Merchant Investment Management designed to give its adviser clients preferential access to business loans for acquisitions or financing succession plans, the companies announced Monday.

While most custodians serving the registered investment adviser space maintain loose affiliations with firms like Live Oak Bank and Oaktree that specialize in loans to RIAs, Fidelity is hoping for an advantage by more directly affiliating with a specialty lender.

“The RIAs need capital to acquire or provide incentives for new advisers and this gives them another alternative, so they don’t have to give up equity to borrow funds,” said David Canter, head of the RIA segment at Fidelity.

For RIAs custodying assets with Fidelity, the partnership with Merchant means a discounted loan origination fee, although neither Fidelity nor Merchant would elaborate on what that discount might look like.

“Today’s most competitive and future-ready firms are achieving scale through M&A, and by our count there are over 700 RIAs that manage over $1 billion, and they’re often doing so with national footprints,” Mr. Canter said. “But it takes capital to create scale, and with the average deal size increasing three-fold in the past five years, access to that capital can sometimes be a roadblock.”

Merchant is a holding company for a private partnership that was launched two years ago with three primary business lines, including acquiring non-controlling minority partnership stakes in RIAs, investing in independent companies that provide services to RIAs, and the lending business now affiliated with Fidelity.

“Merchant was put together with the notion that there’s a lot changing in the financial advice industry, particularly among independents who need capital to grow,” said Marc Spilker, Merchant’s executive vice chairman.

Access to capital is important for RIAs, according to Mr. Canter, because it doesn’t require owners to give up valuable business equity.

“Despite the fact you see M&A in the news all the time, there are those advisers that don’t want to give up equity, and debt capital is cheaper and less complicated than equity,” he said. “If your firm is growing, equity can be the most valuable asset.”

Mr. Canter added that the affiliation with Merchant does not directly generate any revenue or new business for the custodian, and that it is just access to a lending institution with a discounted loan-origination fee.

David DeVoe, managing director of the investment bank DeVoe & Co., said the affiliation with Merchant could give Fidelity a slight edge in attracting RIAs to the custodian platform, assuming that is a high priority for the RIA.

“With small business loans, commercial loans, private equity and a growing number of non-traditional capital solutions, the option set for borrowing has shifted from a dearth to a plethora over the last five years,” he said. “Lending solutions will help in some cases, but many advisers will soon find that even financing can’t bridge the gap. The sooner firms assess their options and implement solutions, the greater the chance firms have of staying fully independent.”