It is not a merger. It is not an acquisition. It certainly isn’t an aggregation. No, the coming together of Savant Capital Management and The Monitor Group, announced Wednesday, is a combination creating a new company, Savant Capital LLC.
The firms’ principals believe the new company will create not only a bigger fee-only RIA firm—with $2.7 billion in AUM and nearly 90 employees—but will also provide a solution to three dilemmas that face many pioneering RIA firms: how to provide continuity for clients, a growth plan with succession overtones for the principals, and a path to ownership for the next generation of advisors.
Those principals—Tom Muldowney, currently Savant Capital Management chairman and principal; Glenn Kautt, president and chairman of The Monitor Group; Brent Brodeski, CEO and principal of Savant Capital Management; and Richard Bennett, Savant Capital Management principal and COO—will form the board of managers at Savant Capital LLC, which will be based in Rockford, Ill., currently headquarters of Savant Capital Management, and will begin its new life with 10 offices in four states and will serve clients in many more states.
In an interview on Wednesday with AdvisorOne, Muldowney, Kautt and Bodeski spoke of what prompted the firms to sign a definitive agreement to form Savant Capital LLC, their plans for growth and why their model might well prove attractive to similar RIA firms.
Muldowney (left) notes that many such principals who formed now-successful RIA firms decades ago but who may now be “60-something” are faced with a challenge when it comes to solving those three dilemmas. “We’re faced with three choices,” Muldowney said. First, RIA firm principals can go with an aggregator who can offer “a lot of money” but also will exercise much control, and “lets the owner slip away.”
The second option, he says, is “to never sell the business, because the annuity value [i.e., the cash flow] of the business is more than the sales value,” Option number two, he argues, also poses a distinct “disadvantage to clients and the next generation of advisors.”
The third option is to make an internal sale to current staff. That’s far from optimal, according to Muldowney, because these firms, he says tongue in cheek, have “become accidentally valuable, making it near impossible for the second generation to afford” such a sale. In addition, he says, there’s the “clumsy” tax consequences of selling a firm. So, he says, “Glenn, Dick, Brent and I brainstormed for quite a while.”
The two firms began talking six years ago under the aegis of the Zero Alpha Group (ZAG), says Kautt, the international association of independent advisory firms of which both firms are long-time members. Those casual talks got serious only a year ago—and in the process they realized, said Muldowney, “We don’t have to sell if we can combine our firms and run it like a publicly held company even though it’s a closely held firm.”
That led to the signing of the definitive agreement on “Monday night at about 9:00,” said Muldowney. Kautt pointed out that the next stage in the combination is to follow the regulatory steps, including notifying both firms’ clients of the combination, which he said would likely happen by the end of June. However, integration of the two firms “begins now” and that “we’re giving ourselves up to a year.”
Kautt (left) stresses that the arrangement is not a merger or acquisition, but a new LLC company that will issue shares to the current owners of both firms with “no liquidity event” thus avoiding the tax consequences, but will also provide the combined company with the ability to share the best practices of both firms, “like we’ve been doing at ZAG” while supplying “more bench strength.”
In the Zero Alpha Group, says Kautt, each member firm tends to share “innovative, out-of-the-box solutions to the issues we all face, so it was not a surprise to me that one of the conversations we had was with Savant.” They realized that "we've got lots of different ways we can end our game and businesses individually, but is there something better? So we’ve come up with this idea which is commonplace in publicly traded companies, but is new in the RIA space.”
Bodeski said that many transactions under the three options outlined above “are done to create liquidity or take chips off the table,” while in the Savant Capital scenario, the four founders are “looking to build something new and relevant and national in scope.” Moreover, Bodeski says the capital structure of the new firm “allows for broadening ownership over time and creates a platform for other companies with similar mindsets.” In the release announcing the combination, Muldowney said “we will continue to keep our strategic growth options open."
Bodeski further points out that both firms were financially healthy—“there’s not a fuse burning here”—and that both “didn’t have to do anything; we’re extraordinarily cash-flow positive.” In addition, he says the cultures of both firms are “near carbon copies” including the underlying core values, and that “there’s extreme alignment; there’s nothing of substance that isn’t in alignment.”
As for where the new company expects to see growth, Muldowney suggested it would come from the two companies’ complimentary strengths. “The average client at Monitor is twice the size” of the average client (as measured by AUM) at Savant, he says, “so they go deeper on philanthropy.” Monitor also does tax return preparation for clients which Savant, while it has tax planning expertise, has never provided to its clients. As for Savant’s complimentary strengths, Muldowney notes his firm has a trust company and a retirement plan division, and has also been successful in serving lower net worth clients.
In the release on the announcement and in the interview, the men said employing the best practices of the two firms will allow Savant Capital LLC to expand the new firm’s service offerings to clients, helping to ensure long-term business continuity while retaining their shared philosophy of a fiduciary, client-centric approach.
In the interview, the three men also lauded the two outside consultants who shepherded the combination process: John Furey, principal at Phoenix-based Advisor Growth Strategies, LLC, the strategic advisor to the deal and David Selig of San Francisco-based Advice Dynamics Partners, the M&A advisor.
Furey (left), said Muldowney, was very helpful in “framing this discussion, and inventorying the commonaliities and differences” of the two firms. Kautt acknowledged that whenever “you have two organizations coming together, there are always personal concerns and agendas,” but called Furey an “excellent facilitator on deciding what the ‘Got-to Haves’ and ‘Want-to-Haves” were of the different parties. Such facilitated conversations, admitted Kautt, “could devolve into an emotional wrestling match; but John minimized it. That’s how we were able to come up with this new idea.”
In the announcement of the deal, Selig said, "This has the potential to be the largest RIA-RIA combination of 2012," and that “the days when transactions of this type were only possible for the large acquirers are in the rear-view mirror. Exceptional wealth managers like Savant and Monitor have realized that joining forces is not only possible, it is an excellent part of a well thought out growth strategy."
Commenting on the broader implications of the partnership, Dave DeVoe, founder and managing partner of DeVoe & Co., said that consolidation of the industry is gaining momentum as more RIA firms develop national or multi-state footprints, listing other RIA firms with “national footprints or aspirations” such as Aspiriant, Mariner, Beacon Pointe and The Mutual Fund Store.
The transaction, DeVoe said, “underscores the growing sophistication of RIAs in mergers and acquisitions. They are using M&A to achieve business goals and objectives beyond growth.” He said that RIAs and consolidators, or aggregators in Muldowney’s words, have been the dominant RIA acquirer categories for the last seven years, and that “these two groups are likely to continue to dominate." However, he expects that "we will see regional and national banks re-enter the market over time. Their engagement will likely help drive up valuations, as they generally come to the market with attractive offers.”