Keys to a Successful Rollup Strategy

Flexibility, culture and the investment thesis will make or break a potential marriage

Put ‘em on a watch list–these guys are going places.

Brian Parker and Derek Holman are co-founders of EP Wealth Advisors, a Los Angeles-based firm with $1.35 billion in assets under management with a focus on financial planning and investment management. That’s right, in an industry where disciplines align like an East Coast/West Coast rap war, they perform both in-house, and are succeeding spectacularly. Did we mention they’re both well shy of 40 years old?

“The financial planning leads to the investment management,” Holman says. “Too often the investment manager will do the risk tolerance and allocation and then run off and invest from there. The problem is the client might say they want an aggressive allocation, but not really understand what that means.”

“From sitting down with our clients, what we find is that it’s not about whether or not to allocate to large-cap growth, it’s about whether they’ll be all right in the future,” Parker adds.

Another big reason for their success is a rollup strategy that’s taking advantage of the current economic and regulatory environment–one that’s disproportionately affecting smaller RIA firms.

“Of the $1.35 billion, about $250 million is from rollups, so it’s a significant portion of what we do, but not everything–we don’t ignore organic growth,” Holman explains. “What our rollup strategy has allowed us to do is to expand into markets we might not have tapped otherwise. A number of the firms have come with untapped referral sources that have greatly befitted us.”

“It’s difficult for smaller RIAs to differentiate themselves, and regulation is disproportionately affecting them,” Parker adds. “Larger RIA firms have a distinct advantage, which smaller firms are beginning to realize.”

But it’s not all “wine and caviar,” Holman says. While many smaller RIAs think life will be easier as part of a rollup, it’s a big lifestyle change, and it’s a slower process than many realize.

“A few of our marriages have gone right to the altar, only to be called off,” he notes. “The smaller RIAs know they have to do something in order to survive, or someone has told them they need to do something, but they can’t get over that hump to actually do it. It’s very emotional for them.”

So what, specifically, are they looking for in the firms they approach? A good fit from an investment and cultural standpoint, to start.

“If we go into a firm, and the person immediately begins to pitch us on why we need to change our approach and adopt their investment philosophy, we know it won’t work,” Parker says. “The technology must also fit, or at least be adaptable.”

But it’s a people business, they both say, and the success or failure will ultimately depend on the personalities involved.

“We ask ourselves from a cultural standpoint, can we work with these people?” Parker says. “How do they solve problems and resolve conflict? How open are they? They have to truly want change.”

Which is all well and good, but it would seem valuable time and resources are wasted if they "get to the altar,” only to have the deal fall through. How do they identify potential success before getting in too deep?

“I wish there was a magic solution to prevent that from happening, but there isn’t,” Holman concedes. “We often tell ourselves that the best deals we’ve done are the ones we didn’t [do]. We pay a lot of attention to subtleties and nonverbal cues, and we learn more each time to help to refine the process.”

The firm has 12 client facing advisors for 1,400 clients, which might seem like a small ratio. The way they effectively service each client is how you might think–through a heavy reliance on technology.

“We’re able to do this is through our institutionalized process, which it technology focused, Holman says. “Last year, we hired a president that was formerly the head of global operations with Nuveen.”

EP Wealth started in 1999 with $5 million in assets under management. The market crashed on the day it opened, but Parker and Holman saw it as an opportunity, as it meant there was a lot of money in motion the partners could capture. By 2003, they had $70 million in AUM, which led to their first merger with a firm with $100 million in AUM. They haven’t looked back since.

"We’ve had success in the rollup space because we’re flexible,” Parker concludes. “We’ve had one deal where the principal wanted to stay or three or four years and then wanted a guaranteed payout. We had another deal that was more open-ended, where the principal wanted to retire at some point down the road, but didn’t really know when. So in many respects, that flexibility is key.”

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