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Mercer Takes Small-Firm Route to the Big Leagues

By Alex Padalka February 17, 2017

In acquiring Duckworth Wealth Advisors this month Mercer Advisors did more than add tax-preparation capabilities to an already broad service roster.

The move, which has taken Santa Barbara, Calif.-based Mercer from zero acquisitions in its first 31 years to a blistering six since the fall of 2015, merely primes the firm to extend the streak for another 36 months — at least.

“We have 23 offices now,” says Mercer’s CEO Dave Barton. “We aim to have 40 offices in total within the next three years.”

At that rate, Mercer could become a name — along with established players like Focus Financial Partners, United Capital and HighTower — in the wealth practice rollup space.

Mercer caught a big fish when it landed Houston-based Kanaly Trust early in 2016, which managed $2 billion. But that was done as much to add corporate trustee capabilities to Mercer’s service menu as it was to add talent and assets and get better access to Texas’ vibrant wealth market, according to Barton.

Similarly, Barton says Duckworth “completes and rounds out” Mercer’s services with tax prep, even as it strengthens its ties to southern California, another private-client hotspot.

But in terms of size, Duckworth — which manages $160 million — is more in line with Mercer’s preferred targets than Kanaly. Specifically, says Barton, Mercer is keen on “firms in the $100 million to $500 million in assets under management range.”

Last month Mercer bought Novos Planning Associates – a New York-based RIA that manages $100 million. Late last year, it acquired Dallas-based Pegasus Advisors, which handles about $50 million of its clients’ money, and Costa Mesa, Calif.-based Fabian Wealth Strategies, which manages $95 million.

Mercer’s focus on smaller RIAs makes sense to Alois Pirker, research chief for Aite Group’s wealth management practice.

Mercer has “the ambition to establish a national franchise — which puts it right up against the big aggregators,” says Pirker. And firms like HighTower, which typically targets big breakaway teams from brokerages, and Focus, which generally goes for established RIAs, “haven’t left too many stones unturned” when it comes to ferreting out high-end quarry, he adds.

In this light Mercer is smart to “go for small firms which haven’t been worked as intensively,” Pirker says.

It’s also a numbers game. There are more firms in Mercer’s target range than there are in the $500-million-and-up club. And smaller firms — especially those closing in on $200 million under management — are often at a narrower impasse than bigger firms. Maxed out in terms of available resources, they either have to press for growth — which can be costly — or resign themselves to relative stagnation, says Piker.

But Mercer doesn’t have this field all to itself, says wealth-firm M&A consultant David DeVoe.

Mercer’s acquisition strategy puts it squarely in what DeVoe calls the “sub-acquisition trend,” which last year accounted for 22% of deals in the wealth management space, up from an average of 11% or so over the previous few years.

These sub-acquisitions involve RIAs buying RIAs. And though most of these deals involve big firms that have private equity backing for their buys – like Mercer and Omaha, Neb.-based Carson Group Holdings – purer-play rollups like Focus and HighTower operate in this area through “tuck in” acquisitions by their affiliates. Mercer’s PE backer is Genstar Capital. Carson’s is Long Ridge Equity Partners.

While cash is vital to an M&A strategy, bringing to bear what Barton calls “a pared-down version of a family office” to firms with middle-market customers probably helps Mercer distinguish itself from competitors.

With investment advice, financial planning, estate planning and tax prep as in-house offerings and complete middle- and back-office functionality built into a chassis that includes business-support services, Pirker says Mercer “brings scale to the table” while offering the cachet of what the firms calls a “Mayo Clinic approach to financial care.”

Adds Pirker: “If you can bring scale, which means better technology and smoother operations, in this segment of the market where there are more clients and firms that are feeling under pressure to provide better technology, you’re bringing something of real value.”

DeVoe agrees. “Scale matters in this industry,” he says. As a result, he adds, “Mercer is a long-term player in this space that can continue to grow organically and by acquisition."