Ken Fisher is a galvanizing force in the investment advisory world. The size and growth rate of his firm, Fisher Investments–which these days counts $45 billion in assets, placed there by 20,000 clients, shepherded by 1,100 employees–is enough to prompt feelings of respect or jealousy, or both, among his smaller, less high-profile RIA peers. There’s more to Fisher than size–there’s his strict discipline when it comes to the portfolios he runs, and the success of those portfolios (he says the average account value at Fisher last year rose 17%). So it’s of more than passing interest when Fisher Investments sets up a division to acquire other RIA firms, and when that division makes its first acquisition, as it did at the turn of the year, acquiring EconoStrat Advisory Corp., an RIA firm based in Bloomfield Hills, Michigan, with a relatively modest $58 million in AUM.

Fisher and Mark Scalzo, group VP and head of mergers and acquisitions at Fisher Investments, discussed the deal and explained their strategy in a telephone conversation with Editorial Director Jamie Green on January 25.

Tell me about EconoStrat.

Fisher: On the one hand, there are small advisors who don’t have a logical place for their firm to go to, and there isn’t an orderly market for transitions that exists for bigger firms. These people often have difficulty and [must decide] if they’re going to sell to a local friend who might not be able to actually run the thing or be able to pay him. With a pure kind of advisory firm, which is what EconoStrat is, we’re looking to buy the relationships, put them into our existing high-net-worth platform, and seamlessly move on. It’s a way for us to get the kind of client that we’re not normally getting through [our] extensive direct marketing activities. We have six psychological profiles that we put people into it. The HNW direct-marketing responsive prospect is only three of the six, or half of the market. The other half is people who don’t respond to direct marketing no matter what, and we can get to them through acquisitions. One of the things we’ve seen in the last year and a half as we started down this path is that we show a lot of advisors that we can actually take over their business, their clients will be fine, they’ll have more servicing capabilities than they’ve had before. We’d mostly wipe out their business and pour it into our platform, maybe keep some of their employees and put them into our platform, too, and the existing structure would go away. In the process of doing this, there’s been a typical response that they can see the appeal–they like what we’re talking about–but they don’t need to do it right away, not for two or three or five years. So we are building up a pipeline, but there’s also been this resistance, a feeling that nobody wanted to be the first.one taken over.

So in EconoStrat we have people who really liked what we were talking about, and their clients are people who come from referrals and aren’t people we normally market to. Otherwise they match the HNW profile perfectly. For us, we’re pleased to have our first deal done. And now we want to make sure we maintain a high retention rate for the clients so that folks that are in the pipeline see what we’ll do if and when we acquire their businesses.

Scalzo: We’re out in the market and actively calling on registered investment advisors and telling our story, but [in this case] the inbound call came from EconoStrat in response to a brief article in which Ken mentioned that we were interested in doing acquisitions of registered investment advisors. They had known Fisher for quite some time, had followed Ken’s writing, and generally felt very comfortable with our investment process. Since they’d didn’t have an internal succession plan, they [figured that] if they were going to look outside, that we seemed like a natural solution to them.

The clients will now be calling Fisher, though, right? You might keep some of those employees of the acquired RIA firms, but maybe not, because you’re all about division of labor and specialization among employees, right?

Fisher: Yes. And if we keep those people, we’d be pouring them into Fisher standard job functions at Fisher standard job locations.

Scalzo: It is likely that with any transaction that there would be a transition period over which that would occur. In this case the founders have agreed to consult with us for a period of time, even though they are not employees of Fisher going forward.

Fisher: Those comments don’t apply if we’re buying the institutional alternative, where we’d be looking to have an institutional performance history or money management style for the institutional market that wasn’t currently in Fisher, therefore we’d need to keep those people because you couldn’t carry forward the track record without those people.

So what are the kinds of firms you’re talking to?

Scalzo: Generally, our universe is RIAs with at least $50 million in AUM up to potentially $1billion to $2 billion. The sweet spot seems to be in the $200 million to $300 million range. Generally, their relationship size is a minimum of $500,000, and the manager is not an in-depth financial planning type firm, but more of an investment manager. That doesn’t mean they can’t be providing some wealth management type services, which are typical for advisors to provide, and we do some of that ourselves, but not a full financial planning capability.

Their compensation would be as a fee for AUM, rather than a retainer fee for providing wealth management services?

Scalzo: Absolutely.

Can you tell me about the terms of the deal?

Scalzo: I can’t talk about specifics, but I can give you a general sense of how we look at deals. One of the points we’re making here is that because we have this huge infrastructure and resources available to us, we can inherit the relationship, take it over very quickly relative to potentially other alternative [buyers]. When most people talk about a transaction, they talk about cash up front of 25% to 35%. We try to be at least 50% up front of the overall value in cash at closing. From there, we try to pay out the remaining amount over an accelerated period of time. Whereas most transactions happen with payouts over three to seven years, we try to do it within six months to two years. We’re trying to not only be relatively aggressive in terms of how we price the revenues, but also in the period of time over which we pay.

How do you value firms–on free cash flow, on revenues?

Scalzo: Generally on revenues: it’s the easiest thing to calculate. So we’ll look at run rate revenues, and generally we can be north of the market–three times revenues and above–because of what we bring to the table.

Fisher: The way I would think of it is what do I think a client relationship is worth as a piece of Fisher versus what it’s worth as a piece of this little independent firm? The multiples on these very small independents is much lower than with something that you would think of as having much larger critical scale. So there’s the room for us to actually pay better than the seller might get if the seller was talking to the other small shop down the street from him, and he gets certainty of payment from us, which is possible because once the client is part of us, it gets the multiple that would be applicable to a larger firm.


Editorial Director James J. Green can be reached at jgreen@investmentadvisor.com.