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Roll-Up Queen

Jessica Bibliowicz says her National Financial Partners has found an enduring formula for buying small firms to make a big empire

As chairman, chief executive and president of National Financial Partners (NFP), Jessica Bibliowicz has done such a good job leading her company that some people wonder whether the eight-year-old firm might have peaked already. Its shares have more than doubled in the less than three years since its initial public offering. And, it has created a network of 375 owned and affiliated financial-advisory firms. (The firm does not disclose client assets under management.)

Bibliowicz says NFP has barely revved the engines of its business model, which centers around acquiring the best independent financial-advisory firms it can to achieve an economy of scale.

“If you think about the marketplace as being thousands today and growing, running out of opportunities does not appear to be an issue for us,” says the 46-year-old chief executive.

To be sure, there are plenty of private financial-advisory firms out there, and many of them are good businesses. Bibliowicz has snapped them up, too, at the rate of 25 a year, with an emphasis on firms heavy into insurance, which has been hot recently. She shows no signs of slowing down either. She made her largest acquisition last year in Highland Capital Holdings, a major insurance broker. Backed by NFP's $2 billion market cap and a fast-rising stock, Bibliowicz has the means to make more owners offers they may find hard to refuse.

Still, creating a network of advisory firms has never been a popular concept with investors, mainly because the acquired businesses are expected to lose steam as their owners-turned-operators age. “Roll-ups don't work over the long-term,” says Jimmy Bhullar, an analyst who tracks NFP for J.P. Morgan Chase.

In fact, Bhullar and other analysts don't give the strategy all that much credit for the run-up. Rather, it was the strength of the main product sold by the NFP firms that has fueled growth, and those days may be gone.

“The life insurance business is less attractive than it was a year ago,” says Stelian Dragan, an analyst who tracks the company for Deutsche Bank. “And that will definitely make it a challenge for them to continue to maintain their organic growth rate.”

Nevertheless, betting against Bibliowicz and NFP isn't easy to do. After all, she and NFP's sponsors have made all the right moves so far. She joined the company as chairman in 1999, after many years of working for her father before he took over Citigroup and a brief stop at a money-management firm. NFP had only just been launched with a $125 million investment from buyout firm Apollo Management (which remains a 20 percent owner).

The new firm was developed on the belief that the future of financial-advisory services lies in building a network of independent registered investment advisory firms providing life insurance products, investment advice and corporate and executive benefits.

Firms that sell out to NFP receive a combination of stock and cash, as well as an ongoing 50 percent share of the free cash flows their businesses generate. Though this can sometimes be a challenging sell to owners of independent brokerage shops, where representatives are used to keeping upwards of 80 percent of production, NFP has nevertheless acquired 165 firms and lined up 210 affiliates. Half of NFP's business comes from life insurance and estate planning, with another 40 percent from corporate benefits work and 10 percent from financial planning and investment-advisory services.

For those who make the leap, NFP's deep pockets allow the company to offer a variety of benefits, including back-office support and technology upgrades. At the same time, NFP promises former owners complete autonomy in how they do business after they've sold to their new parent.

“We've really done something different than anyone else,” says Bibliowicz. She says she's particularly proud of the company's successful IPO. Her timing was perfect. In September 2003, as the market was rebounding, NFP raised $239 million through an offering of 10.4 million shares priced at $23 each. In its first day of trading, its stock closed at $26.25, up 14 percent, or several percentage points above the average for IPO's that year.

In 2005, NFP reported net income of $56.2 million on revenue of $891 million, compared to net income of $40 million on revenue of $640 million a year earlier. The company's stock has made similar strides. As of April, NFP stock was selling in the mid-$50s, a gain of nearly 140 percent from the IPO price.

Healthy Appetite

The majority of NFP's growth is driven by acquisitions. In 2005 the company spent $161 million to acquire 26 practices for an average cost of $6.2 million. For the foreseeable future, Bibliowicz says that NFP plans to add 20 to 30 firms per year, relying heavily on its seven-person mergers-and-acquisitions team to identify promising firms, often on the recommendation of existing members.

According to the 2004 U.S. Economic Census, there are more than 20,000 independent firms providing financial services and advice to individuals. Of those, NFP has identified 4,000 potential acquisition targets and maintains a database of estimated financials on roughly 900 of them.

Ray Ferrara, president and CEO of Clearwater, Fla.-based ProVise Management Group, says he and his partners decided to sell their firm to NFP in 2001, after 16 years of building up their independent brokerage/financial-planning shop. It's a decision, says the 58-year-old advisor, his team has not regretted.

“When I look at the last four years and the rising costs of compliance, of operating from licensing and registrations, even product development and how you have to be bigger to get to many of the top-quality investment opportunities, NFP has given us all of that and more,” says Ferrara. Among the benefits he points to are the multiple networking opportunities NFP provides its member firms and affiliates, continuing education events and access to a larger pool of products than the firm previously had on its own.

Not for Everyone

Still, there are many firms whose owners are too attached to their independence and total financial control to give them up. One of them is Eric Hess, president of McLean, Va.-based Alpha Financial Advisors, an independent, fee-only investment-management firm specializing in financial tax planning, insurance and estate counseling for high-net-worth individuals

“You can't mass produce good results,” he says. “The more you try to mass produce things, the more watered down they get. When you sell out the equity of your practice, you're also selling out the growth of that side of the business, and that can be a high price to pay.”

If NFP has trouble selling its model to advisors like Hess, that could hurt the stock, and shares that don't fly gives Bibliowicz a less-valuable currency to offer takeover candidates. As it is, NFP's multiple is already fairly priced at 37 and may be tough to keep up.

Competition is stiff, and not just among high-end wirehouse financial advisors. Bibliowicz competes with RIAs offering similar services, and there are those who are reading from her playbook — and potentially executing it with equal finesse. Portland, Ore.-based M Financial Holdings is an example of the potential competitors who may make it into the public arena themselves in the next few years. Like NFP, M Financial has created a collection of more than 100 member companies specializing in life insurance and other financial services and products that are sold to wealthy individuals. M averages around $667 million in annual sales.

Then there are independent broker/dealer networks with sophisticated financial advisors, such as LPL Financial Services, Raymond James Financial Services and Commonwealth Financial Network. They are each on the recruiting warpath, aiming for financial advisors who cater to the wealthy.

Bibliowicz says she isn't losing any sleep over the possibility of a carbon-copy competitor swooping in anytime soon. “It's not a short-term build to create a company like this,” she says, noting that such a venture not only requires significant capital to launch, but an extremely long-term investment that not just anyone would be willing to make. “And we've not only been successful in acquiring, but also growing what we think are key strategic platforms for our member firms…so I don't think it's as easy and obvious as it looks.”

She's just made it look that way.

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