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New Fidelity Partner to Offer Discounted Private Loans to RIAs

Through Merchant Investment Management, RIAs that custody with Fidelity will have access to discounted private loans to use for acquisitions. It's a "game changer," said Fidelity's David Canter.

Fidelity Clearing & Custody Solutions is set to begin offering discounted private loans to Registered Investment Advisors through Merchant Investment Management, a lender and service provider to money management firms.

Like all the other major custodians, Fidelity has existing relationships with bank lenders that usually extend traditional loans to advisors like those through the Small Business Administration, or SBA.

Merchant, which is not a bank, will offer private financing–and a discounted origination fee–to registered investment advisors that custody with Fidelity. Separately, Merchant also provides capital and consultation to RIAs in exchange for a noncontrolling, minority stake in the business, and offers firms infrastructure support and other services, such as compliance outsourcing.

“Lending solutions like this one are a game changer for firms looking to make strategic acquisitions to create long-term, sustainable value,” David Canter, the head of the RIA segment at Fidelity Clearing & Custody Solutions, said in a statement.

Selling equity in a firm to raise capital can prove to be expensive in the long run, especially for fast-growing RIAs, Canter said. But because RIAs tend to have little collateral, a short list of lenders offer traditional and SBA loans to wealth managers, and those can take longer to approve and be less customizable, leaving a void for a private lender like Merchant to fill, according to Canter.

Some companies, such as Dynasty Financial Partners, offer both a platform and capital to RIAs, but they don't usually lend to firms they don't already do business with.

“There is a lot of power being put back into the hand of the end clients, which is a very important thing, and end clients are essentially saying, ‘We would like to deal with independent advisors, but they need to be bigger and better,'" said Marc Spilker, executive chairman at Merchant.

RIAs realize that they need to offer broader services and better client experiences, but access to the capital to help them grow into that kind of organization has been lacking, Spilker said. That's why it formally partnered with Fidelity to offer private loans.

"Maybe this is a new model? Maybe it’s more a hybrid of what has been going on in the market?" Dustin Mangone, a managing partner and the director of Investment Advisor Services and PPCLOAN, a nonbank lender that makes conventional loans to RIAs but doesn't offer other services. "It's definitely interesting to hear about. But the big-ticket item is, can [they] be a long-term partner?”

Mangone said that he wondered whether Merchant will grow the loan book as big as it could be, or eventually limit the size and its capacity to give money to borrowers. If the latter becomes the case, then some borrowers in need of another loan would have to look elsewhere and begin a brand-new underwriting process and capital-raising journey.

Canter said that while there are still few providers of debt, the need for capital tied to merger and acquisition activity is growing. Not only is deal volume hitting new highs, deals are getting bigger. 

There were 49 mergers and acquisitions involving RIAs in the first quarter, the highest volume in any three-month period since Echelon Partners, a Los Angeles-based investment bank and consulting firm focused on wealth and investment managers, began keeping track in 2013. Deals exclusively between RIAs tallied 17 in the first quarter, or about a third of the total. If that trend continues, RIAs will be buyers in 69 deals this year, a  41% increase over 2018.

Fidelity, which provides consulting services to its RIAs, does not specifically advise firms to choose any bank or nonbank, or type of loan, Canter said. It also doesn't reap any reward based on their decision, they just provide wealth management firms a list of options and related references, he said. It's on the RIAs and, if they have one, their investment bank to decide what kind of capital structure is best for them, he added.

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