Kochis/Quintile Set the Tone

It’s been a record-breaking year for mergers and acquisitions in the registered investment advisory business, with around 60 deals done through early November

It’s been a record-breaking year for mergers and acquisitions in the registered investment advisory business, with around 60 deals done through early November. Recently, the deal-making took on a new twist: Two major California-based RIAs, San Francisco-based Kochis Fitz and Los Angeles-based multi-family office Quintile Wealth Management, merged outright to create the third-largest RIA in the country, with $5 billion in client assets. The deal is unusual for its sheer size, and because there wasn’t a holding company or giant financial institution involved. What’s more, the new powerhouse firm will have 32 owner-employees and no cash changed hands. Some say it’s the beginning of a new trend in the RIA space.

“This merger—as of now—is rather unusual,” say Moss Adam’s Philip Palaveev. “There are not that many RIAs that actually merge [outright] with each other. However, I believe that it is the beginning of something that we’re going to see more and more.” In addition to building critical mass, and possibly higher valuations, Palaveev says an important motivation for merging two large firms like this is succession planning. With a larger pool of owners, there are more potential buyers for a retiring executive’s stake in the business. (When there are fewer partners, it is often difficult for them to come up with the cash to buy another partner out.)

Rob Francais, CEO and a founder of Quintile, says such combinations help firms retain and attract talent. “The idea of having 32 owners supports this notion that ultimately those 6 founders will transition out of the business and the other 26 shareholders” will take over. “Essentially you have an equity pool, a transition mechanism to clarify the route to ownership, and equity participation for the non-founders,” Francais says. Palaveev agrees: “It really makes sure the firm aligns its interests with its employees, and avoids the wirehouse problem that eventually your best people leave with your best clients,” he says.

Succession planning is an important issue in the RIA industry today. Indeed, according to Schwab, the average age of an investment advisor representative (IAR) is 55. As more firms mature, Palaveev says he thinks the industry will see more of the kind of merger Kochis Fitz and Quintile arranged. For example, the Kochis Fitz/Quintile merger establishes a succession plan in which Tim Kochis, co-founder and CEO of Kochis Fitz, will be the CEO of the new firm until mid to late 2009, after which Rob Francais, CEO and founder of Quintile, will take over. In addition, 18 new principals from both firms were named equity partners.

Of course, there are some other firms that have distributed employee ownership very broadly. According to Palaveev, typically a firm will have one partner for every million dollars of revenue it earns (which equates to roughly $150 million in AUM), and a firm with $1 billion in assets will probably have about six or seven owners. (The newly merged firm, which for now will be called Kochis/Quintile, fits that model nicely: Thirty-two owners for $5 billion in assets, or six for every $1 billion.)

While the biggest acquirers of RIAs have been holding companies like NFP Securities or Focus Financial Partners, which account for roughly 30 percent of the deal activity, according to Schwab, outright mergers between RIAs are ranked next on the list. But few of the very biggest RIAs in the country have combined forces until now.

Dennis Gallant of Gallant Distribution Consulting in Sherborn, Mass., says providing high-net-worth individuals with wealth management services is a resource-intensive business, so scale is something that most firms are trying to achieve. But it’s not just about “cashing out,” he says. “It’s their legacy they want to leave behind, and so they have to find the right match. If you look at the fact that it is an aging marketplace, you’re going to see more of these things start to happen, because people are looking to exit the industry. Aging principals of these RIAs are going to be looking for ways to merge, buy out or sell their practice.”

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