Questions linger about what some firms will look like post-IPO or merger
Consider the aggregators in the advisory business.
As recently as 2008, the term “aggregator” was tarnished by doubts that any kind of roll-up could work for advisors. National Financial Parters was foundering, its stock having sunk to $2.01 after hitting a high of $55. Focus Financial’s acquisitions had slowed after the company hit $29 billion of assets. HighTower Advisors had been formed, but was too young to have a track record. United Capital was still in the mode of acquiring almost exclusively smaller advisors — sometimes as little as $100 million of AUM.
Brimming with venture capital
Now, just two years later, the aggregators are riding the economic recovery into the forefront of the business. Brimming with venture capital, the aggregators are winning big-name advisors and being embraced by custodians and others in the business.
Just last week, Bernie Clark, head of Schwab Advisor Services, identified aggregators as a key part of custodians’ wirehouse recruitment efforts.
“Consolidators are going to free more assets from the wirehouses,” he said.
For its part, Fidelity just invited the heads of the three top aggregators – Rudy Adolf of Focus Financial Partners, LLC, Elliot Weissbluth of HighTower and Joe Duran of United Capital Financial Partners — to speak on a panel at the company’s national internal conference for about 250 sales and relationship personnel.
Brand is out there
“We’re embracing these partnerships and we think there’s big upside,” says Scott Dell’Orfano, national sales director for Fidelity Institutional Wealth Services. “Their brand is out there now – especially with HighTower and Focus.”
If the aggregators are able to build out fast and create sustainable business models that emphasize the ability to transition a practice from one generation to another, some experts are even saying they could be a model for the evolution of the business away from single-location mom-and-pop businesses.
“RIA firms are beginning to look more and more like broker-dealers in terms of being multi-office, multi-location businesses with advisors pursuing disparate strategies,” says Mark Tibergien, CEO of Pershing Advisor Solutions. “Consolidators … are functionally serving as the middle office like an IBD.”
Of course, big questions remain about the aggregators’ future. Once the companies move from aggregating to stitching together a company, a different kind of management orientation is required.“I think some of them will be like a super nova, going from a burst of light to a black hole in a short period of time,” says Tibergien. “If I have one worry, it’s who and how these businesses will be led and managed by once they’ve achieved critical mass and once their venture backers have been repaid with a return.”
The past offers little reassurance, even looking across industries. Some $30 billion in capital went into the formation of consolidators in the 1990s — and much of that investment was lost, according to press reports at the time. Well-known fizzles include: Waste Management, AutoNation and U.S. Office Products Co. In the advisory business, National Financial Partners followed the script of disappointment, though the company is attempting a turnaround and it’s stock is up 500% from its low. See: Bibliowicz’s turnaround plan for National Financial Partners includes rolling up RIAs
Different this time around?
Observers say this group of agreggators has a chance of overcoming that history because of six different factors.• Sheer number and diversity
Three companies — HighTower Advisors of Chicago ($18 billion of AUM), United Capital of Newport Beach, Calif. ($13 billion) and Focus Financial Partners ($40 billion of AUM) of New York – grab the most attention. Since the fall of 2009, these companies have secured $100 million, $15 million and $50 million of venture capital or private equity funds respectively.
But there may be as many as 25 companies that are considered of aggregators right now, including such firms as publicly held Sanders Morris Harris Group, Gen Spring, Stancorp, Evercore and “maybe” Aspirant, according to Dan Inveen, principal with Tacoma, Wash.-based FA insight.
While the venture-backed companies are growing fast – and are the ones that observers say might burn out – those in Inveen’s list appear to have a longer-term growth orientation, he says.
• Capitalization and backing
“This round of financial advisor aggregators is far better capitalized, and has far deeper management teams – and boards of directors,” says Charles “Chip” Roame, managing principal of Tiburon Strategic Advisors. Roame is currently working on a research paper on the aggregators.
Focus is backed by two elite Boston-based VC firms — Polaris Ventures and Summit Partners, which put up $35 million and $15 million respectively in late 2009. Dallas-based Fiduciary Network, the brainchild of Mark Hurley of Undiscovered Managers fame, has a long-term investor in Emigrant Savings Bank and owns part of esteemed firms like Brouwer & Janachowski LLC and RegentAtlantic Capital.
HighTower has a board made up of David S. Pottruck, former CEO of The Charles Schwab Corp., and Philip J. Purcell, Morgan Stanley’s former CEO, and recently received $100 million in funding mostly from Asset Management Finance of Boston and New York, in which Credit Suisse is significant investor. Pottruck and Purcell themselves invested the remainder, adding to previous capital contributions. See: Weissbluth lands war chest for HighTower Advisors [Updated]
• Big checks
In the wake of liberal retention bonuses by Wall Street firms, aggregators are able to help move wirehouse brokers who might otherwise be persuaded to stay. They are able to ante up cash to acquire practices in addition to equity.
“The ability of people to write big checks makes a difference,” says Rudy Adolf, CEO of Focus Financial. See: 7 things to know about retention bonuses and why the post-check ether may be wearing off
• Big wins in the advisory column
Nothing speaks like success. In the past year, the aggregators have signed on a roster of impressive firms. Focus Financial purchased Evansville, Ind.-based Pettinga Financial Advisors, which manages close to $600 million of assets. HighTower nabbed New York City-based Morse Towey & White, a former UBS team that manages about $1 billion in August.
On Dec. 31, United Capital bought the assets of Bethesda, Md.-based Zirkin-Cutler Investments Inc., which has more than $1.6 billion in AUM and serves more than 300 family and institutional relationships. It was formerly the wealth management division of M&T Bank.
“Today, a $100 million firm led by highly capable advisers with a client-first focus still might make sense for us. As a national RIA with offices all over the country, we’re not turning away from a potential acquisition or recruitment effort based on the size of assets alone,” says Dana Alan Kurttila, vice president, corporate finance and development.
The qualitative shift is notable, according to Roame.
“These firms already have more traction than prior aggregators or roll-up firms. The firms that have signed on from Brouwer & Janachowski to Evensky, Katz, Brown to Richard Saperstein’s gang are very impressive. Prior starts never really captured these name (brand) advisors.”
• Deeper ties in the industry
The fact that the custodians are beginning to give aggregators public praise is telling. Indeed, aggregators and asset custodians are enjoying a tighter symbiosis as the latter learns the strengths of the former. Aggregators are zeroed in on making independence an off-the-shelf product.
“It’s very intimidating. We demystify the process. Ultimately, it’s much easier than they think,” says Rudy Adolf, CEO of Focus Financial. “We significantly increase the chances of success in the transition. And once they are running the business, they are learning from the best. We have almost 700 people to learn from rather than them learning from their own trial and error.”
HighTower is building out its management team — and using advisors in key roles to preempt the possibility of conflicts.HighTower makes an executive out of a partner to fine-tune advisor access to investments
United Capital actually took many ofUnited Capital calls its partner firms to Berkeley to help execute ambitious plan its advisor partners for MBA classes at Berkeley. See:
• Track record
The companies have all gotten better at helping advisors to succeed not only in transitioning – in an atmosphere of little risk and hassle – but also in growing their practices in the aftermath. This is establishing a good track record for the companies. In all Focus grew by about $8 billion in 2010, with roughly $6 billion in organic growth (including market gains) and $2 billion from acquisitions, according to Adolf.
HighTower is in the process of building out a management team that puts some of its advisors in charge. HighTower makes an executive out of a partner to fine-tune advisor access to investments
But will they opt for an early sale?
Whether or which aggregators emerge as sustaining forces in the business remains to be seen. The venture-backed aggregators, including United Capital, HighTower and Focus Financial, face the most significant doubts.
“Firms that are VC-backed likely have no more than seven years to develop and execute their plan,” Roame says. “If you are there when that happens, it’s a second transition for you (to endure).
“The skeptic would say that the firms that the (aggregators bent on a liquidity event) will likely someday sell to a bank. So if you stay long enough, you may work for Bank of America. If your timeline is shorter or if you an aggregator backed by more of a long-term investor, you may have more stability.”