Archive for March, 2009

Two RIA Buyers Hone Focus to High-End Firms

Friday, March 13th, 2009

Published inFUNDfire – An Information Service of Money-Media, a Financial Times Company
By Tom Stabile

Two outfits rooted on opposite sides of the country are basing future growth on acquiring uppercrust independent advisor firms, and both plan to close more deals this year.

Denver-based First Western Financial recently bought an independent registered investment advisor (RIA) firm in California, and has three more acquisitions set to close in the next three months. And Samoset Capital Group of Darien, Conn., has been ramping up to obtain majoritystakes in RIAs or to lift-out wirehouse teams, in both cases focusing on advisors with $500 million to $3 billion in assets.

Both are targeting advisors who roughly serve the $2 million to $25 million investor. Each outfit also offers an open architecture platform for most or all investment vehicles. And one firm already has private banking and trust services; the other plans to add those capabilities in-house.

First Western and Samoset are each aiming at a “sweet spot” of advisors that cater to investors who are “too big” to get tailored attention at a broad-based wealth manager but “too small” to fit into elite environments, such as multi-family offices, says Andrew Klausner, principal of AK Advisory Partners, a strategic consultant in Boston.

“The RIA marketplace has been and will continue to be a driver of growth in wealth management,” Klausner says. But he adds that while it’s a good time to have a growth model based on buying RIAs, these firms need to ensure they are presenting a unique value proposition, both to the advisors they want to acquire and to the investor end-clients.

First Western’s most recent acquisition is its seventh of an RIA, says Scott Wylie, the boutique bank’s chairman and CEO. Wylie is a former chairman and CEO of Northern Trust Bank of Colorado, and he co-founded First Western with Warren Olsen, who is vice chairman and CIO and a past president of Morgan Stanley’s mutual fund business.

First Western closed on its acquisition of GKM Advisers of Los Angeles, an RIA with $353 million in assets under management, on April 30. It now has three offices in California, one in Arizona, and five in Colorado. And it intends to continue growing in the Southwest and Western regions by acquiring more RIAs, Wylie says.

“It’s definitely an integral part of our strategy to expand into new markets,” he adds. “We’re a pretty unique strategic buyer, and that was true two years ago, it’s true today, and it will be true two years from now.”

The First Western model entails acquiring the RIA and then adding private banking and trust specialists, along with its technology infrastructure, which includes proprietary systems and a trust operations platform. Each location operates as a local boutique with its own board andofficers, but it takes on the parent name.

The firm has $2.5 billion in assets under management, focusing on the $2 million to $20 million client, Wylie says. He adds that the firm has capital in place to continue making acquisitions, with a focus on the Western U.S., in part because of a belief that the market is distinct from the East Coast version.

Wylie says while private banks on the Eastern side of the country work with a lot of intergenerational clients and families with “19th Century” wealth, the focus in the West has more of a first-generation flavor, with entrepreneurs and other “wealth creators.” And he says that begets a different culture, because clients in the East tend to want to have their wealth “taken care of,” while Western clients are more likely to want private bankers who treat them as partners.

First Western’s investment approach, overseen by in-house staff, combines proprietary strategies – largely separately managed accounts (SMAs) for domestic equities and fixed income – with similar third-party manager options, as well as outside managers for alternative investments and specialty asset classes.

Back East, Samoset’s inaugural acquisition closed last year, but it was an anomaly, says Peter Milhaupt, head of sales and new business development. The outright purchase of Baldwin & Clarke Advisory Services, an RIA with $120 million in assets under management, doesn’t fit the core model Samoset intends to employ, which will focus on obtaining stakes of 51% to 75% of advisor firms.

“We’re leaving a meaningful equity position with the partners,” Milhaupt says. “It’s built around the premise that we’re truly partnering with RIA firms.”

That original deal, self-financed by Samoset’s 15 partners, helped to jump-start its platform, which combines asset management with financial planning, estate planning and insurance services. Samoset also intends to acquire a private banking and trust division, Milhaupt says.

Two pending acquisitions are now in “active discussions” and others are in earlier stages, both with existing RIAs and with wirehouse advisor teams eyeing a move, Milhaupt says. Samoset will offer them elements such as an open architecture investment lineup, built with an internal due diligence team; succession planning financing; a client planning and reporting system that can take in liquid and illiquid assets; and a suite of advisor practice systems to handle matters such as portfolio accounting and trade order management.

Samoset will also handle central matters such as compliance and human resources, as well as marketing and best practice research. The firm plugs into five custodial partners.

While the model is akin to “holding companies” that had been active buying up RIA firms in recent years, Samoset appears to be aiming more exclusively to high-end firms than its peers. It also will offer access to its platforms on a private-label basis to similarly focused RIA firms.

Milhaupt says the goal is to create a national brand, though the early focus will be on the East Coast. The plan entails opening 10 to 12 “beachhead” offices that will serve as hubs for other offices, including acquired RIA firms, within their regions. “The last thing we want is to have hundreds of offices dispersed around the country that need to be managed individually,” he says.

Crisis Hurts Small Managers Most

Saturday, March 7th, 2009

Published inFUNDfire – An Information Service of Money-Media, a Financial Times Company
Written by Andy Klausner, CIMA, CIS,  the founder of AK Advisory Partners LLC., a strategic consultancy serving the wealth management industry.

While no segment of the financial services business has been shielded from the devastating effects of the credit crisis, the outlook for many smaller investment management firms seems particularly dire. As such, I believe that the next 12 to 18 months will be characterized by a wave of mergers and firm closings.

Particularly hard hit will be small firms (managers with $1 billion or less under management) and mid-size firms ($1 billion to $2 billion under management). While many managers above that threshold will continue to lay-off staff and reduce costs, many in this larger segment of the marketplace should survive relatively intact and perhaps become more diverse as they buy up some of the firms that can no longer remain freestanding.

My bleak outlook for smaller and mid-sized investment managers results from the fact that these firms are being squeezed on multiple fronts.

  • These managers will be impacted externally by the significant changes taking place among their distribution relationships. As the larger sponsor firms continue to consolidate on both the retail – Smith Barney and Morgan Stanley– and institutional – Callan Associates and Mercer– sides of the business, opportunities for smaller andmid-size managers will inevitably decline. In addition, there will probably be few opportunities for managers to add additional strategies or enter new programs with  these merging wealth management sponsors until the current sponsor integration process is complete. The same goes for managers seeking to stand out to institutional consultants who are integrating their operations together.
  • These shops will also be impacted internally by the economic reality of lower revenues (resulting from lower AUM) and higher operational costs (resulting from theincreased need for transparency). This will affect their internal profitability and thus their long-term viability.
  • Last but not least there is of course the issue of performance. Any manager thathas not performed in line with its peer group is especially vulnerable in today’s market environment. Firms that are smaller and have only one or two strategies will find it hard to survive.

On the retail side, as trends lead to fewer but significantly larger sponsor firms (with tens of thousands of advisors), the pressure on managers to have larger marketing teams will also increase. And as more advisors join or start their own registered investment advisor firms, the independent distribution channel’s decentralized nature will add to a manager’s cost of sales support and client service. Advisors and clients will also continue to need a lot of handholding and they will increasingly look to their managers for support – both in-person and via value-added materials. The annual cost to compete in this marketplace may just become too high for firms with limited resources.

On the institutional side, standards for new managers will continue to increase. There will be stronger demand for increased transparency, verifiable operationalcapabilities, and well-documented compliance procedures. Firms with greater resources available to them will be better equipped to satisfy the increasing scrutiny of institutional consultants and sponsors. Those firms without the staffing and systems to rise to the occasion will face dwindling prospects.

For all managers, it is more important than ever that they be able to clearly articulate their value-added proposition and demonstrate why they should be considered for particular assignments.

Nevertheless, for all of the above reasons, it seems clear that the investment management market of the future will be characterized by fewer and larger firms. Along the way, all firms will see pain. Smaller firms will have to merge or close. Larger firms will also have a rough time – witness Harvard Management Company’s recent decision to lay off 25% of its staff.

But the larger firms have the resources to survive. They will emerge as the winners. Whether bigger will be better for clients long-term will not be known for many years.