In this piece for The New York Times, journalist Paul Sullivan reports on the current consolidation trend that is impacting wealth advisory firms nationwide and ultimately how this development impacts clients.

Portfolio Off-Kilter? Could Be Time To Rebalance It

Wealth Advisory Firms Are Merging, but What’s in It for Clients?

by Paul Sullivan, September 13, 2019

Wealth management firms, big and small, are being bought at a rapid pace. A 10-year bull market has pumped up their values, and bigger wealth management companies and private equity firms are looking to acquire those that have a steady, predictable cash flow from fees.

This is great for the advisers who have ownership stakes in the acquired firms. They receive a large payment from the buyer, usually some multiple of the annual fees they generate. They get a succession plan, since someone else will be there to take over when they retire. And they get to hand off tasks they may not want to do, like risk management, compliance with federal rules, human resources and other back-office functions.

But what’s in it for the client?

After all, the value of any wealth management firm comes from the money invested and the fees generated from managing it. And that money comes from just one place: the people who have entrusted those advisers with thousands, millions, even billions of dollars.

“The problem is the uncertainty from the client perspective and what the acquisition may mean to them,” said Rob Elliott, former senior managing director of Bessemer Trust and retired vice chairman of Market Street Trust Company, the investment vehicle for the family behind Corning glass. “If your adviser says, ‘This will be seamless to you, we’ll handle all the changes’ — the transfer of assets, the retitling of things — look out.”

“The adviser is going to say, ‘We’re going to have the same team.’ But will you really?” Mr. Elliott added. “There are going to be new members of the team. Your adviser will assure you that he’s the key person and it’s going to work. Maybe the acquiring firm is going to get acquired again. Or what’s to stop the broker from changing one more time?”

The first half of 2019 set a record both for the number of deals for advisory firms and for the amount of assets that were transferred, according to a report by Fidelity. In the biggest acquisition, Goldman Sachs agreed in May to pay $750 million in cash for United Capital, which manages $25 billion.

It seemed like a town-and-gown match. United Capital’s founder, Joe Duran, was a leader among registered investment advisers who sought independence from larger firms and served single-digit millionaires. Goldman Sachs, on the other hand, is known for focusing on ultra-high-net-worth clients.

When deals occur, the first concern for clients is probably what will happen to their adviser. Maybe the adviser sold the firm as a path to retirement — at which point the client may be better or worse off with the replacement. Or the adviser may have wanted to free up more time to spend with clients or to get access to a platform or technology that the firm could not otherwise have afforded. Both of those outcomes could benefit clients.

Jill B. Steinberg, a partner at Beacon Pointe Advisors since selling it her firm in 2017, said she had been able to balance the small feel of her office, which has six employees, with the benefits of the larger firm’s more sophisticated software for relationship management, wealth planning and access to investments.

But will the acquiring firms push their advisers to sell clients products that earn higher fees? That’s a hard one to answer, since no firm is going to admit that’s the plan, and because what you get for your money matters, too.

David Barton, vice chairman of Mercer Advisors, has been acquiring smaller advisers — about 26 since 2016, with five more set to close soon — and he now manages $17 billion in assets, up from $8 billion in 2016.

He said Mercer had generally shied away from buying firms that charged high fees, because they probably would not be a good cultural fit. But it’s also tricky when a firm charges lower fees than Mercer.

“If the firm has lower fees, we’ll keep those intact for a period of time,” Mr. Barton said. “But if the clients want access to everything else we offer, they have to go to our fee schedule.” That includes free estate planning and tax preparation done at a reduced rate.

Rick Buoncore, managing partner at MAI Capital Management in Cleveland, tries to solve the fee problem by grouping clients into three buckets: retirement clients who are saving to stop working, estate planning clients who have more than $15 million, and family office clients, whose assets are at least $50 million.

“There is a commonality to it, but the retirement client doesn’t need everything the family office client needs,” he said.

There’s the option, of course, of moving to another firm, but that’s a hassle, especially for wealthier, more complex families.

Mr. Elliott gave the example of a family that has a trust with an institutional trustee. Moving to another firm requires that all the assets in the trust be retitled, naming the new institutional trustee. It’s time consuming and stressful if not done properly.

The same goes for a new firm that suggests using a new accountant to prepare taxes, Mr. Elliott said. “That’s a potential loss of privacy, since there’s a whole new set of people who are aware of your wealth,” he said.

So is this wave of consolidation of wealth management better for clients or advisers? That answer depends on whom you ask.

Bob Oros, the new chief executive at HighTower Advisors, which manages more than $60 billion, said his goal when HighTower acquired firms was to give more to clients. But, he said, he also wants to provide teams that often worked in isolation with the shared knowledge of HighTower’s 250 advisers.

Mr. Elliott argued that consolidation wasn’t better for the type of wealthy clients his firms served. Those firms should grow organically, he said. But he does see a spot for smaller advisory firms that provide advice to clients of more modest means. It could give them capital for costly needs like cybersecurity and resources to get their practice to a critical mass.

Brad Bueermann, chief executive of FP Transitions, which values wealth management firms and advises them on sales, said small might be better for many clients. And he disagreed with the premise that bigger platforms offered more technology and better access and abilities.

“We firmly believe at the client level that doing business locally with people who understand the community where their clients are going to retire into and who have a close connection to the client are better,” he said. “Independent practices have flourished for a reason: Consolidation is the world we came from 30 years ago.”

Mr. Duran, who walked away from his deal with enough money to qualify as a Goldman Sachs client, said less wealthy clients needed to be aware of the deals their advisers were taking. This is a frothy time, when prices being paid for firms are high but so, too, is the amount of debt buyers are taking on to pay them.

“If the adviser sold to someone who took on a lot of leverage and the market goes down, there’s a problem operating the business because there’s too much debt,” he said. “This happened in 2007.”

And that could mean constraints on what advisers can do for clients — the worst of both worlds.

This article was originally published in The New York Times on September 13, 2019

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