From the October 2004 issue of Investment Advisor • Subscribe!

October 1, 2004

Transition Time

Considering a transition? You're in luck: There are plenty of options, and the market is hot.

An increasing number of independent advisors are either putting their businesses up for sale, selling a portion of their firm, or looking for the best way to hand over the reins to coworkers or family members. These days, there are quite a few services that can help advisors achieve any one of these goals.

A couple of graying shareholders in Ken Sullivan's planning firm were seeking more liquidity when they decided to sell part of Duncker, Streett & Company to Nashville-based WealthTrust, Inc. The St. Louis-based planning firm wanted to spend more time serving current clients and marketing to new ones, so WealthTrust bought 56% of Duncker (with plans to acquire more), and is now providing Sullivan's crew with essentials such as compliance services, technology, and Web site design.

More and more independent advisors are choosing to hook up with a strategic partner like WealthTrust to maintain their competitive edge. "We have the best of both worlds in that we can think and act like a small local business," Sullivan says. And if need be, the firm can tap the deep pockets of WealthTrust to provide "assistance in the areas of technology, research, and back office," he says.

Smaller independent firms "are competing against very big companies," says Rusty Benton, WealthTrust's CEO. Broker-age firms "very efficiently let the broker do what he does best, which is get new clients and take care of his current clients. The broker doesn't have to worry a lot about compliance, HR, or other issues that our small business owners have to worry about." WealthTrust is focused on providing advisors with "all of the administrative, operational, and compliance aspects of their business, so they can spend time on how to manage money and get new clients."

Unlike some banks and other acquisition firms, WealthTrust won't run an advisor's practice like a branch office. "Wealth Trust is very aware of the nature of our business, and how important it is to be independent," Sullivan says. Adds Benton: "Banks want to own 100% of the firm, and fold it into their operation. This means the advisor has to start managing money the way the bank wants."

The WealthTrust Way

WealthTrust (www.wealthtrust.com) is unique in that it helps provide advisors with a succession plan. When buying firms, "we leave some equity on the table," Benton says. "When a senior principal retires, we'll buy his equity back, and then we'll sell it to a younger person in the firm." By doing this, "we are a conduit for that equity to pass from one generation to the next and stay within the firm," he says. Benton says he spends time with the senior principals in each firm to define their retirement strategy. He asks such questions as, "'How long do you want to work? Do you want to keep working part-time for a while and bring the younger people to the point to where they're ready to become principals?'"

But WealthTrust doesn't only do deals with advisors who are looking for a succession plan. Defining a succession plan "tends to be the catalyst that creates an opportunity to do a transaction, but it's not the only reason we would want to buy a firm," Benton says. For instance, an advisory firm in Chicago recently sold a portion of its business to WealthTrust in order to raise some capital.

Benton started WealthTrust in 1999 with his own money, and he acquired his first firm that same year. He wanted to create a business that would buy high-net-worth investment firms, so he jumped in his airplane and flew around the country floating the idea to investment firms. Benton needed money to fund the acquisitions, so he went to Memphis-based brokerage firm Morgan Keegan, which agreed to put up the capital. WealthTrust is now majority owned by Morgan Keegan, which in turn is owned by Regions Bank, based in Birmingham, Alabama. WealthTrust's "ultimate parent is Regions Bank," Benton says, "so there's a big checkbook." But Benton insists that he still runs the show. "I own a significant piece of the business, and it is an entrepreneurial effort that the bank has funded."

All told, WealthTrust owns eight advisory firms, which collectively manage $5 billion. The firms vary in size. One firm has $100 million in assets, which is small by Benton's standards. Another one manages $1.2 billion. But the average firm manages $500 million in assets, he says, and he'd like to keep acquiring firms in that asset range. In Benton's mind, a firm has "to be at that level before you have a business that's worth something." Benton says he's also looking to only acquire fee-only financial advisors that are primarily money management firms. "We differ from National Financial Partners (NFP) because we're not buying broker or commission-related firms."

Benton doesn't shun smaller firms, however. In fact, he created a subsidiary called WealthTrust Advisors specifically for them. He has acquired two firms so far--one with $100 million in assets and another with $200 million--that are now part of WealthTrust Advisors. These firms "really need to be folded in from an operational standpoint," he says. But the firms "continue to operate independently in the sense that they manage their own money." Affiliates of WealthTrust Advisors become employees and must use the WealthTrust moniker. The firms "will be on our healthcare, our payroll, we handle all of the compliance, and provide them with Advent portfolio management" software, Benton says.

Acquisitions vary, Benton says, but most include cash at closing plus an earnout over a couple of years. "What is common [to all of the transactions] is that we are not buying 100% of the equity; we're not just cashing somebody out so that they can retire," he says. "They may retire over a five-year period if they have a good succession [plan] already in place."

One of the larger firms Benton recently acquired was listed on Schwab's Advisor Transition Service. Schwab's service "has been a great program for us because it's elevated the discussion about succession planning," Benton says. But the majority of the firms listed on Schwab's service are too small for WealthTrust to consider.

Meanwhile, at Schwab

Charles Schwab's Advisor Transition Service (www.schwabtransition.com) was launched in January and now has about 300 firms listed for sale, says Tim Welsh, director of strategic programs at Schwab Institutional. Advisors who are looking to "merge, add more assets to the firm, or add new capabilities" use Schwab's listing service, Welsh says. "The listing service also helps those firms looking for an exit strategy that don't have a successor in their firm to find a potential [outside] buyer." Succession planning is a subset of the services Schwab provides, he says. "For those firms that are looking to grow, we can help them look at other firms for potential merger." For firms that want to build a succession plan, Schwab provides consulting and planning resources through best practices workshops. "We've had such a great response to [the workshops] that we're rolling out another set of them in 2005," Welsh says. Schwab also provides firms that want to make themselves more efficient and profitable with referrals to industry experts, he says.

So far, Schwab's listing service has resulted in eight transactions. "We're starting to see activity pick up," Welsh says. Firms that list on the site vary in size. More than half of the firms have more than $100 million in assets under management, he says, with some hitting the $2 billion mark. Schwab charges advisors $100 per quarter to list on the Web site. "The reason for a fee is to make sure they're serious," Welsh says. If a transaction occurs, Schwab charges the seller 1 basis point on the seller's assets. "We'll cap that at $10,000," he says.

The listing service is purely a value-added program for advisors, Welsh says. Most "independent advisors' goal is to transition their business internally--to bring people up within the firm," Welsh says. "From a client transition point of view, that's the best way to go." The listing service "is an accommodation for those firms looking to grow and those firms looking to exit."

Business Transitions

If you're thinking of selling your practice, now's the time to do it, according to Business Transitions. The Portland, Oregon-based company recently released its first-ever RIA Transitions report, and in it says that "it looks like a seller's market for some time to come."

The report's author, William Grable, president of Business Transitions Publishing, takes issue with how the industry is interchanging the terms succession planning and transition planning. "A succession plan and a transition plan are not the same," he says. Grable notes that Schwab's Transition Web site argues that "the formal goal of transition planning is to determine the most appropriate ownership/management succession strategy...." Says Grable: "The goal of a transition plan is to determine what your succession plan is? That's backwards."

A succession plan, Grable says, is "a strategy that culminates in the transfer of ownership to the next generation." A transition plan, on the other hand, "is a new concept describing a strategy for the actual transference of ownership." The term "transition planning," Grable says, "was created by, and for, the practices that don't have, and never want to have, a 'real business' or a successor in the form of a partner or well-qualified employee to enter ownership and take over at a predetermined time in a predetermined fashion."

Now that we've cleared that up, it's probably a good idea to take a gander at the RIA Transitions report, which was sponsored by Fidelity's Registered Investment Advisor Group (FRIAG). In addition to outlining the overall state of the marketplace for transitioning RIA practices, the Transitions report provides details on how to structure a deal and on the characteristics of both buyers and sellers of RIA practices. It also includes charts detailing the actual sales prices and deal terms on firm transactions completed through Business Transitions.

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@ia-mag.com.

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