A newfangled model for helping independent investment advisory firms transition ownership to the next generation of employees has attracted two of the industry’s more established financial planning businesses.
DETROIT — A newfangled model for helping independent investment advisory firms transition ownership to the next generation of employees has attracted two of the industry’s more established financial planning businesses.
Evensky & Katz Wealth Management in Coral Gables, Fla., and Regent Atlantic Capital LLC in Chatham, N.J., each have signed deals with Fiduciary Network LLC in Dallas that trigger a gradual process of ownership transition and retirement of the current owners.
“There are certain elements to the Fiduciary Network model that we haven’t seen anywhere,” said John Temple, managing director at Cambridge International Partners Inc., a New York-based investment banking firm that specializes in asset management firm mergers and acquisitions.
“A lot of buyers are only prepared to take majority stakes, and they want a lot of control,” he added. “But the objective of [Fiduciary Network] is to help a firm stay independent and keep it management-run.”
Mr. Temple, who was hired by Regent to evaluate a range of ownership transition options, described the structure of the deal as an “equity recycling model that’s designed to go on in perpetuity.”
The basic model involves next-generation employees’ taking out loans from Fiduciary Network to purchase equity in an advisory firm from the current owners as the latter approach retirement.
The loans are repaid by the next generation from the firm’s future cash flow.
The entire transition process, which is designed to extend over a decade or more, depending on the ownership structure — pegs the ultimate acquisition price to a firm’s future earnings, giving both incoming and departing owners the incentive to keep the business healthy.
“We had been looking at [transition] opportunities for years, and none of them worked for us,” said Harold Evensky, chairman of the fee-only advisory firm he started 22 years ago, which now oversees $550 million in client assets.
Maintaining control
Mr. Evensky, 64, plans to transition ownership primarily to three of the firm’s senior-level advisers over the next six years.
The transition model not only allows management to maintain control of the business, it also results in a significant price premium over most other sales and transition options, according to Mark Hurley, president of Fiduciary Network.
“This is a structure that pays the first generation a full and fair price, which is two or three times what these firms would get through the alternative sales options,” he said.
That is accomplished through the gradual purchase of equity by next-generation owners at multiples that adjust with the firm’s future income stream, said Mr. Hurley, who is known for his studies on the financial planning profession.
The formula’s dependence on a growing income stream is part of the reason Fiduciary Network will work only with fee-only firms with at least $500 million under supervision.
“‘Fee only’ is the best thing for the client, and it is what makes the model sustainable,” Mr. Hurley said. “This is for firms where the profits are growing, and it is not for advisers looking to just get their money and leave.”
The Evensky and Regent deals, both signed within the past two weeks, are the first of more than a dozen anticipated over the next 18 months, Mr. Hurley added.
Mr. Hurley, who sold his Dallas-based mutual fund company, Undiscovered Managers LLC, to JPMorgan Chase & Co. in 2004, has aligned himself in his latest venture with Howard Milstein, the deep-pocketed chairman of Emigrant Savings Bank in New York.
According to Mr. Hurley, the Milstein family has committed $600 million to invest in what amounts to convertible loans to finance generational business transitions for select advisory firms.
In exchange for the leveraged investments in the advisory firm transition deals, Mr. Hurley said, the Milstein family expects annual returns in the low teens.
Over the course of a typical multiyear transition, Fiduciary Network will establish some equity in the company, but only limited control over how the firm is run.
“We stay invested indefinitely, and for bigger companies, we will have a bigger [financing] hole to fill,” Mr. Hurley said. “But we would prefer [that] more ownership rather than less goes to the next generation, because that’s our best protection that the company will stay profitable and successful.”
Partners in their 60s
The model is considered well suited for a company such as Regent, which dates back to 1982 and oversees $1.6 billion.
“The value of the income stream is greater than the next generation could afford to pay,” said David Bugen, 58, one of seven Regent partners positioned to transition out of the business over the next 20 years.
There are six next-generation advisers in line to start acquiring equity through the transition process, which will see the first of three partners who currently are in their 60s retire in three years.
As with Evensky & Katz, Mr. Bugen said, the key is maintaining independence and control of the business.
“We didn’t want to be consolidated as part of a roll-up, and we didn’t want to be sold to a bank where we might have to start selling bank products and no longer be fee only,” he said. “But we also couldn’t afford to just sell it to our employees at a significant discount.”
Mr. Temple expects that there will be some mimicking of the Fiduciary Network model.
“There’s no reason a firm can’t grow indefinitely if you can solve the problem of transitioning ownership to the next generation,” he said.
