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Monday, Jul 4, 2022

Unique Period in History Unites Wealth Managers

The wealth management industry is in the midst of a historic consolidation period as increased regulation, new technology and succession concerns spur merger and acquisition activity.

The first quarter of 2017 saw a record 44 deals in the registered investment adviser space, according to data from investment banking firm DeVoe & Co., which specializes in wealth management consulting. Yearly deal volume also exploded to 145 in 2016 from 59 in 2013 – an increase of 146 percent over the past four years.

L.A.-area wealth management firms have been active players in M&A. West L.A.-based Aspiriant has snapped up three wealth management firms in the past two years, including a January merger with Stanford Investment Group. Aspiriant Chief Executive Rob Francais said the firm now has $10.5 billion in assets under management – up from $2.5 billion in 2008 when the firm completed its first merger – and operates in 11 cities.

“Firms that have more scale will be able to weather the issues facing the industry,” Francais said. “A larger institution can implement a succession model and scale helps deal with the perceived threat of robo-advisers and … with the regulatory environment.”

While mergers of private standalone firms, such as Aspiriant, make up a significant part of the wealth management deal flow, there have been notable other transactions. Publicly traded B. Riley Financial Inc., also in West Los Angeles, purchased Wunderlich Securities for $67 million in cash and stock options last month. The deal added about $10 billion in assets to the firm’s financial advisory portfolio.

B. Riley Chief Executive Bryant Riley said his firm views the brokerage and financial advisory businesses as artificially deflated assets primed for a rebound.

“We think (the industry) is a little distressed right now,” Bryant said. “Our basic thesis is that not everyone is going to do everything on an online platform and passive investing is overrated. You can’t just pick a random bucket of stocks without any advice and expect success.”

Present concerns

Riley’s prognostication about the future of the wealth management market does little to alleviate the issues facing financial advisers, especially small and midsize outfits. Regulatory oversight has increased dramatically since the Great Recession with the advent of Dodd-Frank laws, pushing firms to spend more time and money on compliance.

This increased expense for wealth managers has been compounded by the rise of so-called robo-advisers. These digital financial advisory companies, examples of which include New York’s Betterment and Wealthfront Inc. of Redwood City, offer online tools to help investors manage their own money with minimal human intervention.

Some bigger wealth management outfits, such as Merril Lynch, Charles Schwab Corp. and Vanguard Group, have co-opted the robo-adviser model by offering their own online wealth management platforms. But smaller firms have struggled to compete.

Both of these hurdles come at a time when a large number of baby boomer-generation wealth advisers are reaching retirement age and looking for an exit or partnership to help with succession planning.

At least one of these three issues drive almost every merger or acquisition in the financial advisory space, according to Mark Delfino, chief executive of San Diego wealth management firm HoyleCohen, which acquired Santa Monica’s Libbie Agran Financial Services & Seminars last week for an undisclosed sum.

“The business at its core continues to be under price pressure,” Delfino said. “That’s a trend that you have to fight with a robust value proposition, which comes with a broader footprint of wealth management services.”

Differing deals

How wealth management firms achieve this broader footprint varies.

HoyleCohen, which has $1.7 billion in assets under management after the Libbie Agran deal, can offer some of those services because it is a wholly owned subsidiary of New York’s Focus Financial Partners, a privately held company with more than 40 wealth management firms under its control. Focus Financial acquired HoyleCohen in 2006, although the subsidiary operates independently.

Firms that are rolled up – either directly by Focus Financial or through one of its subsidiaries such as HoyleCohen – can opt for different levels of payout, according to Delfino. Some take a full buyout – usually wealth managers who are retiring – while others keep a percentage of equity. Those that retain equity are paid a cut of the firm’s revenue through a third-party management company.

That’s a different model than Aspiriant, which brings in merger targets as full firm partners. Francais said Aspiriant has 62 partners, which account for more than a third of the firm’s 185 employees. The model is popular and is starting to gain traction, he added, noting the firm has 15 other potential mergers in the works with plans to announce at least one more deal in 2017.

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