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Private Equity Drives Wealth Firm M&A Like Never Before

By Thomas Coyle June 14, 2018

Among independent financial advice providers, big firms are getting bigger thanks to favorable underlying growth trends, business structures designed to empower serial aggregation and an accelerating stream of cash pouring in from private equity investors.

In the first quarter of 2018, “strategic aggregators” — which get "the bulk of capital funding” for their acquisitions — “were responsible for more than two-thirds of M&A transactions,” the institutional arm of Fidelity Investments says in a report published last week. That’s up from 47% in the same quarter last year.

As a case in point, this week Wealth Enhancement Group, a Minneapolis-area planning firm with $8.5 billion under management, an RIA of its own and brokerage affiliation to LPL Financial, acquired Cimino Wealth Advisors, a Clinton, Wisc.-based LPL affiliate that manages about $495 million. PE firm Lightyear Capital has held a controlling stake in Wealth Enhancement Group since mid-2015.

For Wealth Enhancement Group, buying Cimino is about taking a “significant step toward the long-term strategic goal” of establishing itself as a “national wealth management and financial planning brand,” the firm says in a press release.

In its push to make a national name for itself, Fidelity says a firm like Wealth Enhancement Group is up against a growing coterie of $5-billion-plus outfits with similar ambitions. In turn, these firms are increasingly likely to be backed by PE firms led by people with firsthand and high-level experience in the industry.

Take New York-based Lightyear, a PE player famous in M&A circles for making a killing when it sold Cetera Financial Group in 2014. Its chairman and founder Donald Marron was Paine Webber’s CEO when UBS bought the brokerage at the turn of the millennium and turned it into UBS Financial Services. Lightyear’s managing partner Mark Vassallo is another high-level veteran of Paine Webber.

Pedigrees like that give Lightyear a broad perspective on the wealth industry that can help their portfolio companies spot and execute better deals, according to Fidelity.

More particularly, in helping Wealth Enhancement Group acquire Cimino and others along the way, Lightyear knows it’s tapping into a growing industry with solid growth potential and an unusual resistance to cyclicality, Vassallo tells FA-IQ.

“People think about this market as cyclical because of the stock market, but it really isn’t,” says Vassallo of the wealth management M&A space. “In the past 15 to 20 years, even in stock market declines there has been growth” in independent advice channels. “People’s problems get bigger and their need for advice increases” in downturns, he adds. “Private equity has taken notice” of that.

And it happens that independent firm aggregators — whether RIA rollups like Focus Financial Partners or independent broker-dealers like those in the Lightyear-owned Advisor Group network — are an efficient way to get at that upside.

With PE fueling so much M&A activity, Scott Slater, head of consulting and practice management for Fidelity’s custody and clearing unit, says advisors and practice owners who hope to benefit from PE money — even if it comes at a remove — “really have to understand what these investors want.”

Acquirers backed by PE firms often invest in practices whose owners are expected to stay on and work to make the practice grow and develop as part of a bigger and usually highly-integrated entity.

In general terms, this makes practice founders who are keen to cut and run — and those who aren’t team players to the bone — unsuitable candidates, says Slater.

Mark Vassallo

For Slater, practice owners looking to tie in with PE-backed buyers also have to be rigorously open-minded. Whether straight from the source or filtered through the acquirer, PE executives “can help you with advice and guidance,” says Slater. “So you need to be receptive.”

In effect, PE execs are like fitness trainers. “You can do a lot by yourself in the gym, you really can,” says Slater. “But you get that much further working with a trainer because they can challenge you.”

Shirl Penney runs Dynasty Financial Partners, an infrastructure and credit provider to independent RIAs that functions without a dime of private equity money. Instead, most of its seed funding comes from individual board members — men like American Express ex-CEO Harvey Golub and Citigroup’s ex-chief investment officer Todd Thomson — “with institutional levels of wealth,” he says.

But Penney’s anything but denigrating about PE’s role in wealth management consolidation. “They’re out there driving the holding companies” to buy firms, says Penney. “And we’re all in favor of M&A in this space.”

In fact, New York-based Dynasty plays a PE-like role for some of the independent firms in its network — only it does so through lending rather than purchasing equity. When an acquisitive Dynasty firm like Summit Trail buys a practice, it’s likely to have worked closely with Dynasty at every stage.