Fidelity unit in pact to open cash spigot for RIAs

Fidelity Institutional Wealth Services has opened a relationship with Live Oak Bank that the custodian hopes will solve a chronic problem for its RIA clients: financing acquisitions and successions. Live Oak Banking Co., which launched a specialized investment advisory lending unit at the beginning of this year, is offering a dedicated lending team and expedited credit decisions to Fidelity's registered investment advisers as part of the deal. “Firms approach us weekly saying, 'We want to grow by acquisition,'” said David Canter, executive vice president and head of practice management and consulting at FIWS. “But what we find they really [want] is access to capital.” Professional-service firms such as RIAs often have difficulty obtaining business loans without tangible capital. Live Oak, which has dedicated lending units for veterinarians, pharmacists, dentists and other medical fields, “understands the recurring revenues of these professional-services businesses,” Mr. Canter said. Fidelity also said it is rolling out new services to educate advisers about buying or selling other firms, as well as to help potential buyers and sellers connect. Although deals between RIA firms are often plagued with cultural miscues and disagreements over price, lack of financing is often the biggest deal killer. “Our due diligence told us that there's a lack of consistent financing options” for advisers, said Steve Smits, manager of the investment advisory lending team at Live Oak and a former associate administrator at the U.S. Small Business Administration. The bank has noticed that custodians have been making some loans selectively to RIA client firms, Mr. Smits said, “but they're not in the lending business, and only do it if it's absolutely necessary. That tells me there is a lack of access to capital.” “Some of those loans are [being] made reluctantly,” said James “Chip” Mahan, founder and chief executive of Live Oak Bank. “If you're on other side of that trade, why would you [the RIA] want your custodian to have any leverage over you?” Mr. Canter said Fidelity has seen interest already in a “pre-application phase” of the program and expects that most RIAs will be looking to finance acquisitions, either for other firms or for adding tuck-in advisers. The program will use loans backed by the SBA, which requires a personal guarantee. If the loan defaults, the SBA typically backs 75% of it, Mr. Smits said. Live Oak is giving Fidelity RIAs a credit toward the SBA loan fees. “Historically, banks have been unwilling to lend into the investment advisory industry without personal guarantees and … substantial amounts of liquid collateral,” said Jim Tennies, president of InCap Group Inc., a mergers consultant. The liquid-assets requirement is the larger problem, he said, and if Live Oak is lending “based on cash flow with personal guarantees, that's a step in the right direction.”