A fragmented legion of independent financial advisers controls a growing share of the retail investment business. Meanwhile, an increasing cadre of larger financial services companies is on the prowl to buy these firms.
Sounds like a recipe for deal after deal, right?
Actually, apart from isolated acquisitions, the deals in the financial planning world aren't happening, frustrating both would-be buyers and sellers.
"We've been re-evaluating (our acquisition strategy) almost on a daily basis," gripes Jeff Joseph, who heads the acquisition program for Essex LLC, a subsidiary of the Chicago accounting firm Friedman Eisenstein Raemer and Schwartz LLP.
California consolidators that have expressed frustration with the slow pace of deals are Sherman Oaks-based FundMinder Inc. and Reinhardt Werba Bowen Advisory Services of San Jose. Assante Capital Management, a Canadian company, recently bought Reinhardt and plans to pump in $200 million of capital for adviser buyouts.
Deals are stymied as two cultures clash at the negotiation table.
Prospective buyers -- larger planning firms, financial institutions, money managers and even mutual fund companies -- complain that their targets don't run efficient businesses. They'll offer peanuts, not the premium planners expect.
From the planner's perspective, not only are the offers underwhelming, they'll have to account to a parent -- particularly since most acquirers demand the planner remain aboard for at least a few years to prevent client defections. Independence has been a main selling point for most planners, and merging into a larger company could undermine that marketing edge.
Still, the dance continues, because the buyers want the planners' rosters of clients -- and their assets.
Independent fee-based advisers control just 9% of consumers' $11.6 trillion of investable assets, placing them third behind retail banks and full-commission brokers. But since 1994 assets controlled by fee-based advisers have grown faster than any competitors' -- a 36% annual clip, according to the International Association for Financial Planning.
Planners want to sell for two reasons. To compete, many need economies of scale they can achieve only by tapping the resources of a capital-rich corporate parent. Others are nearing retirement and want an exit strategy.
Officials at Schaumburg, Ill.-based Essex, a relative newcomer to the fray, say they ran into numerous roadblocks after starting to pursue buyouts of independent advisers last fall. The firm, which supervises about $500 million, has yet to close a deal after six serious attempts, although officials say two agreements are close.
The typical pitch to buy a financial planning practice sounds logical. As these businesses grow, their back-office responsibilities become more complicated, which means more employees, which means more management burdens. An acquirer offers the seemingly enticing prospect of merging back offices and reducing the management hassle, freeing the planner-seller to focus more on planning for clients' needs.
There's usually a catch, however. The acquirer, often a money manager, typically will insist on running the money. The planner is removed from the investment-selecting process and becomes what's euphemistically called "a relationship manager."
Prospective sellers chafed at that aspect of Essex's initial acquisition model, Mr. Joseph says. Others didn't see enough savings from the back-office consolidation to make a deal. And there were the inevitable differences over valuing the businesses.
Now, Essex is taking a more flexible approach, emphasizing the added revenues it can bring to an adviser's practice through the accounting and consulting expertise of the parent accounting firm.
Moreover, the firm is offering targeted advisers different partnering structures -- from acquisitions to strategic alliances -- as well as allowing them and their clients to walk away if the deal doesn't work out.
Solution to every problem
"We will buy, we will acquire, we will merge, we will affiliate," Mr. Joseph says. "For every different candidate, there will be a different solution."
Not helping matters is planners' aversion to working for someone else. Many quit brokerage houses long ago to avoid having a boss. The last thing they want to deal with as they enter their retirement years is a stodgy bank culture or a hard-driven money management firm.
"Guy goes out and runs his own business, his head's about this big," says John Payne, a partner at Houston Asset Management, holding his arms wide apart. Mr. Payne says that though his firm isn't for sale, it received a call about selling out from a local competitor late last month.
One prominent Virginia planner looking to sell his practice says he is having a tough time finding buyers. The adviser, who asked to remain anonymous, doubts consolidation is inevitable, because planning firms are so varied in their client bases and their services that deal-making will be tough.
"Why aren't all the law firms doing it?" he asks. "Because a law partner is an individual with an individual practice. It's the same with financial planners."
Planners ought to use accountants as an example, says Robert Klosterman, who heads White Oaks Wealth Advisors, a Minneapolis planning shop with $70 million under supervision. Accountants seem to have a relatively established model for selling their practices, which sell roughly for two times revenues, he says.
"It's almost a rubber-stamp kind of deal," he says. "We're a new profession. There are not enough sales of financial planning-wealth management-type practices to give us guidance for what those things might be going for. We have numbers all over the board."
At 47, Mr. Klosterman, whose youngest child is in eighth grade, is at least 10 years from retiring, but -- being a good planner -- he's thinking about the future. "I plan for retirement assuming (my business) will be worth nothing, at the same time secretly hoping it's worth a lot."
Familiarity breeds contempt
Buyers also complain that the more they scrutinize planners' balance sheets, the less attractive these firms look. Many evaluate firms based on their cash flow, which they are finding planners don't have a lot of. Revenue per $1,000 of assets is declining in many firms, because debt and expenses are increasing, says Mark Tibergian, a consultant with Moss Adams LLC in Seattle.
Still, the number of potential buyers and sellers is growing. Indeed, Charles "Chip" Roame, a partner at Investment Management Strategies, a Belvedere, Calif. consultancy , has compiled a list of potential buyers. Among them: Assante, GE Capital Corp., Mellon Bank Corp. and Value Asset Management.
Mr. Roame, a former executive at Charles Schwab & Co., is now a consultant to mutual funds and financial institutions who sell their wares to independent advisers. Such firms want the recurring revenues that financial planners bring in, particularly those who charge a fee instead of a commission, so he thinks consolidation is inevitable.
"I wouldn't go as far as to say a lot has happened yet," says Mr. Roame. "But two years ago no one was talking about it, and a year ago talk started. Five years out it will have to happen."
Trying to push the process is John Bowen, chairman of Reinhardt Werba Bowen, which manages index mutual funds for advisers. Mr. Bowen broadcast last summer plans to raise capital to purchase firms -- and now Assante has provided it.
Firmly entrenched in the financial planning community, he's preaching the gospel of building efficiency and equity to planners. He and his staff were in New Orleans last week, as they have been at many other conferences, leading workshops for planners on how to use the model of McDonald's Corp. franchise to eke out higher cash flows and efficiency.
Mr. Bowen and three consultants he uses led workshops to help planners. And one of those, Mr. Tibergian, gave his own lecture.
"Someone managing, say, $100 million, making $125,000 a year, working 70 hours a week: His business isn't worth anything," Mr. Bowen says. "The only money that counts is free cash flow."
Mr. Bowen and Mr. Tibergian say planners are evaluating their businesses incorrectly. Many believe their practices are worth twice the revenues they bring in, but that's not what buyers are looking at. They will pay four to six times cash flow, far less than many planner firms expect.
At his session in New Orleans, Mr. Tibergian offered a case study of one of his clients. Based on typical planner expectations, she would have demanded $700,000 based on her 1997 revenues. In reality, a buyer would have seen debt and inefficiencies, and -- based on a formula of six times her free-cash flow -- would probably have offered her a paltry $97,000.
Planners, he says, "are getting too low a price because they're not managing for profitability and building up a transferable book of business."
