(post-gazette) There are only about 700 financial planning firms in the country managing client assets of $1 billion or more.
Earlier this month, Pittsburgh wealth management firm DBR & Co. became one of them. Its purchase of another financial advising company, R. Applegate & Associates, added another $220 million in client assets under management to its ledger — pushing DBR over the $1 billion mark.
It’s not just a personal benchmark for CEO David Root, who started his business from scratch in 1994 with three other people. The really large firms are in a position to dominate the wealth management marketplace. Size, scale and cash flow enables them to provide top-level technology driven tools to manage client accounts, investments that smaller independent firms often can’t afford.
“Bigger is better,” said Mr. Root. “And that’s important in this industry because it is a consolidating industry. The bigger registered investment advisers are getting bigger, and the smaller ones are really having a hard time growing.”
The pressure is coming from all sides. More investors are switching from actively managed accounts to passive funds, such as exchange-traded funds and index funds. That has led to asset managers having to lower the fees they charge clients.
With downward pressure on fees, the only other way for investment advisers to increase revenues is to increase their assets under management — either by attracting more clients organically or by joining forces with other firms.
For the sixth straight year, merger and acquisition deals for registered investment advisers set a record, according to the National Association of Plan Advisors in Arlington, Va. The 181 transactions in 2018 represented a 7 percent increase over 168 in 2017, which was a 21.7 percent increase over 2016’s record year of 138 M&A transactions.
Locally, those deals included DBR & Co.’s purchase of $220 million in assets under management from R. Applegate; Strip District-based Mid Atlantic Capital Group’s purchase of $90 million in assets under management from Boston-based Partheon Capital Partners; and Fragasso Financial Advisor’s purchase of Beaver-based Paul Meho Investments in November, which included $80 million in assets under management.
Doing the math
The silver lining here is it means the red carpet has been rolled out for veteran financial advisers with no succession plan who want to retire.
“As a general rule, when we put a practice up for sale, we get 50 to 70 inquires,” said Eric Leeper, vice president of FP Transitions, a Portland, Oregon-based company that brokers the sale of wealth management firms. “In some major metropolitan areas we could get 100 inquiries or more.”
It’s easy to see why buying a wealth management practice is worth the effort when he breaks down the math. Investment advisers typically charge clients a fee of 1 percent to 2.5 percent of total assets under management.
A small investment firm with $250 million in assets under management probably has two partners with each earning between $500,000 to $750,000 each per year.
“That would be an extremely desirable firm to take over,” Mr. Leeper said. The firm would be valued at between 2.2 to 2.5 times its revenue, which would make that one worth between $5 million and $6 million.
Smaller firms will sell for lower prices, but are still likely to attract buyers.
Most of the wealth management firms he works with generate between $200,000 to $10 million in annual revenue. Investment adviser firms generating $10 million or more in revenue generally are not listed publicly for sale.
“The sweet spot for investment firms is usually between $250,000 to $5 million in revenue,” Mr. Leeper said.
Recent volatility in the financial markets could be fanning the flames, since the value of an investment firm is tightly connected to the performance of the stock markets. Investment advisers thinking of retiring may want to do so while the markets are still relatively high.
The big get bigger
Data shows 72 percent of the roughly 18,000 independent investment firms — mostly solo advisers — have less than $100 million in assets under management, according to a report by Cerulli & Associates, a Boston-based research company for the financial services industry.
Their combined assets only account for 7 percent of total industry assets, estimated at $2.2 trillion.
The bulk of the assets are concentrated in bigger firms. Cerulli reports that 60 percent of registered investment adviser assets are held by firms with more than $1 billion in assets under management.
“So if you think of it this way, if the larger advisers — those who have $1 billion in assets or more — increased their assets by 10 percent, they literally will control all the assets,” Mr. Root said, explaining that as larger firms grow it becomes more difficult for smaller firms to achieve organic growth on their own.
“That’s what’s happening,” he said. “That’s very much the trend.”
The 700 firms that have $1 billion or more on average are growing 20 percent plus per year.
And the concentration of investors’ funds is getting even more focused among the largest players. The 40 largest registered investment advisers in the industry as listed by Barron’s in 2018 grew by more than 40 percent.
Mergers are happening at that level, as well.
Fairfax, Va.-based Edelman Financial Services, with 37,351 clients, combined this year with Sunnyvale, Calif.-based Financial Engines, with 1.1 million clients — creating the nation’s largest private wealth manager. That list does not include major financial companies like Vanguard and T. Rowe Price, which are mutual fund companies instead of regsitered investment advisers.
Ready to buy
“Our motivation three years ago was to position ourselves as a fully independent registered investment adviser that would give us the opportunity to grow at that 20 percent plus level — which we have — and to give us the opportunity to become one of those 700 firms that have $1 billion or more,” Mr. Root said.
Robert Fragasso, CEO of Downtown-based Fragasso Financial Advisors with $1.4 billion in assets under management, has made two acquisitions in recent years.
The first purchase occurred in 2015 when he acquired the Grandview Group in Zelienople, bringing in about $70 million in assets under management. That office was later folded into his company’s existing Pine Township office. Most recently, Mr. Fragasso bought Paul Meho Investments in Beaver, which brought in another $80 million in assets under management.
Mr. Fragasso said that office will remain in Beaver due to its strategic location in the natural gas industry. Likewise, he is moving one of his South Hills branches to Washington County for the same reason. ”We are looking to buy practices within a 100-mile radius of Pittsburgh,” Mr. Fragasso said.
He has other expansion routes, too. “Alternatively, we also can license our system to people who are not yet ready to sell.”
Mike Blehar, managing partner and co-founder of Green Tree-based Fort Pitt Capital Group, said his company has yet to make an acquisition, but he is working on a deal involving $250 million in assets under management with a firm in Florida; a potential acquisition for $750 million in assets under management with a firm in eastern Ohio; and he also is in discussions with a few investment firms in Pittsburgh.
“We’ve always wanted to make sure we do a deal that is a true cultural fit with our firm,” he said. “Anyone doing an M&A is terrified of doing a bad deal,”
That’s true for the seller, as well.
“The owner on the other side also is apprehensive,” Mr. Blehar said. “They want a good deal financially. But they care about the people who helped them become successful and they want to make sure it’s a good deal for them, too.”
Leaders of some of the Pittsburgh region’s largest financial advising firms — including Hefren-Tillotson with $11 billion in assets under management and Bill Few Associates with about $470 million — declined to comment on any plans to expand through mergers and acquisitions. A spokesperson for Hefren-Tillotson said the firm has always focused on growing internally.
Sometimes the housekeeping has to come first.
With $1.8 billion in assets under management, Waldron Private Wealth in Bridgeville ranks among the largest wealth management firms in the Pittsburgh region.
While the firm is considering acquisitions in the region, the first step in its long-term strategy was to nail down a succession plan and position itself to grow beyond the life span of its owner and founder John Waldron, 59.
The management team last year purchased a minority interest from Mr. Waldron, which they said is more than 10 percent, but less than 50 percent of the firm’s value.
With managers now owning a stake in the company, the people responsible for running the company are heavily invested as part owners, said Matt Helfrich, president of Waldron Private Wealth.
“So we are eating our own cooking in terms of putting a foundation in for our future success,” he said.
