United Capital seeks conformity from advisers

Joseph Duran, chief executive and co-founder of United Capital Financial Partners Inc., believes he has a better plan than other consolidators on the national scene for extracting value from a disparate group of wealth managers.

Unlike most so-called roll-up firms, which buy a portion of the practices of brokers and independent investment advisers and let them operate fairly autonomously, United Capital wants firms to adopt its name, its financial planning and prospecting methodologies, its technology platform and its research. The parent firm also files a single ADV form for its partners, meaning that new clients generally must conform to a uniform pricing structure.

Such operational, organizational and legal conformity is the only way to build brand equity that can lead to a high valuation for the Newport Beach, Calif.-based firm 10 years or so down the road, he said. Buyers will value firms more highly if there is a systematized and institutionalized business process that can survive the departure of individual advisers, Mr. Duran contends.

“We don’t tell advisers everything will stay the same for them,” he said, contrasting his strategy with such competitors as National Financial Partners Corp., Focus Financial Partners LLC and HighTower Advisors LLC.

Mr. Duran also admits that he has run into many doubters among prospects and capital providers as he tried to impose a blueprint on entrepreneurs who began their practices because of their love of independence.

“Some cowboys are willing to join the cavalry, and will shed control and be an operating partner,” he said. “But many will never be part of the team.”

While the model may create some tensions with entrepreneurial advisers, several observers said, much of it makes sense.

“Anyone in a personal-service business who doesn’t systematize some of the routine acts in a methodical check-the-box process has less opportunity to spend time with human beings,” said Sheryl Garrett, founder of Garrett Planning Network Inc., a consortium of fee-only planners who charge by the hour for their services. She said she was unfamiliar with United Capital’s operations.

“United has a unique model for taking a fragmented group of brokers and folding their books into an institutionalized model,” said Mark Hurley, chief executive of Fiduciary Network, which finances sales of registered investment adviser practices to internal successors. “The question is whether they’re setting the financial incentives correctly to continue to build value.”

Since its first acquisition in May 2005 of Houston-based Financial Synergies, United has acquired 31 RIAs and broker practices that oversee about $10 billion in assets in 25 offices. It’s a relatively slow process, but Mr. Duran, 42, who was part of a management team that in 2001 sold independent broker Centurion Capital Group Inc. to a General Electric Co. unit, insists that his backers have patience.

He also concedes that he’s learning as he goes.

Mr. Duran said he once believed that he would sign up many brokers from wirehouses and other full-service firms who were looking to move to fee-only businesses. While about one-third of United offices consist of former full-service brokers from companies such as UBS Wealth Management, The Bear Stearns Cos. Inc. (now part of JPMorgan Chase & Co.) and Oppenheimer Holdings Inc., Mr. Duran is finding that independent broker-dealers such as Commonwealth Financial Network and Ameriprise Financial Services Inc. are his most fertile recruiting grounds.

“Two years ago, I thought full service was an interesting opportunity, and they can be great additions to an established office, but they’re not who you want to establish an office,” he said. “They often don’t have the know-how to run a [profit-and-loss statement] or negotiate a lease, and they really want large amounts of cash upfront. Frankly, they’re too expensive for us, since equity is not cheap.”

Like most roll-ups, United buys practices with cash, notes and stock, and tries to emphasize the stock portion. That means it also is looking for some sort of partial sale or recapitalization within the following three years to allow partners, management and the firm’s equity backers a way to realize some liquidity.

United Capital’s founders own about a third of the company as do its adviser partners and its principal investors — Donald Putnam’s Grail Partners LLC and Bessemer Venture Partners, each of which has invested about $15 million.

Mr. Putnam bought his stake at a split-adjusted value of $2 to $3 a share, and Bessemer, which invested last fall, got in at about $3.70 a share, according to Mr. Duran.

Most advisers in recent deals have taken stock valued at a little over $4 a share, he said.

To avoid the mistakes of some competitors, who may have paid too much cash to keep them engaged, United likes sellers to retain about a 50% interest in their businesses. Mr. Duran said that he is attempting to convince some advisers who sold more of their cash flow to the company to repurchase some of it, but none has done so.

United Capital has no debt, and its management and backers have no preferred calls on advisers’ cash flow, helping it to avoid the pressure some rivals experienced during the market downturn, he said.

Mr. Duran said United has more than $15 million in cash on its balance sheet and will spend almost $8 million this year to support its local offices.

United has closed three deals with advisers this year, and Mr. Duran said that he is close to recruiting an RIA and a broker in the Atlanta area as part of three acquisitions to be announced this summer.

Longer-term, he estimates that United will have a 10-year run before it fully cashes out through a sale or public offering.

But he doesn’t underestimate the challenges. “There are always people eyeing the space, and there will not be enough room for all of us,” he said.

E-mail Jed Horowitz at [email protected].