While it’s still unclear as to whether The Colony Group and Focus Financial Partners union announced last week is the largest merger by assets under management completed in the RIA space so far this year, one thing is certain: the deal is sophisticated and accomplishes strategic and financial goals for both firms at the same time.
It’s also indicative of a much more active merger and acquisition climate in the industry.
“Everyday, at least one new firm that appears at our doorstep with an acquisition strategy,” Mark Tibergien, chief executive officer of Pershing Advisor Solutions, said in an interview Thursday.
At Financial Planning’s request, Pershing Advisor Solutions and FA Insight completed a rundown of the five-largest merger and acquisition deals involving RIA firms. Please take a look at this interactive slideshow of the five largest RIA deals consummated so far this year.
The Colony Group-Focus Financial deal accomplishes three big strategic goals and objectives, Dave DeVoe, managing director of strategic business development for Schwab Advisor Services said in a telephone interview.
It monetizes some of the equity in the firm, helps accelerate its succession plan, and expands the firm’s national footprint.
Colony Group plans to expand from its existing Boston headquarters, plus offices in West Palm Beach and Naples, Florida, as well as Washington, D.C., to other regions in the U.S., according to a company statement.
Principals are becoming savvier about how to build value in their firms and tap into it when opportunities come along, according to industry observers.
“This year, 2011, is on track to be a solid year for M&As in the RIA space,” DeVoe said. “It will likely be off the highs set in 2010.”
Not all observers see The Colony Group’s deal as strategic, primarily. Although exact terms were undisclosed, the deal’s financial characteristics suggest that the Boston-based firm was looking to monetize equity in its business. “It had less to do with business continuity and more to do with taking chips off the table,” he said.
The deal differs from the strategic mergers and acquisitions that Tibergien observes at Pershing Advisor Solutions. In most cases, RIA firms look to pair up with other practices that share their strategic vision.
“There is far more activity among likeminded RIAs to merge with each other,” Tibergien said, referring to one finding from the custodian’s forthcoming third-quarter “Real Deal” assessment of M&A deals in the RIA market.
The RIA M&A market had some strong upward momentum for several years until the market declined in 2008 and 2009, DeVoe said. During that downtime, buyers and sellers negotiated a number of deals that eventually closed in 2010.
The Colony Group and Focus Financial Partners announced their deal last week. Boston-based Colony Group will become a partner with Focus Financial, bringing $1.3 billion in assets under management to the table. The companies did not disclose financial terms of the deal. New York-based Focus Financial did say, though, that Colony Group brings Focus Financial’s AUM to $45 billion, and that the deal is its fourth for 2011.
The Colony Group will also be able build equity in TCG Management, the entity formed as a result of the transaction, Michael Nathanson, chief executive officer and president of The Colony Group said in a Tuesday interview.
TCG Management will manage everything about The Colony Group, from its historical business looking after its more than 800 clients to potentially functioning as a platform that offers useful services to other advisory firms, large or small, Nathanson said. Nathanson will become chairman of TCG Management.
Focus Financial is known to give partnership firms wide latitude in how they operate day to day, Tibergien said.
There are about 20 firms similar to Focus Financial Partners, which buy stakes in smaller RIA firms. Over the next five to 10 years, there will be a lot of trading of ownership in RIA firms, as principals act on the need to expand the scope of their practices, Tibergien said.
What is unclear for the industry is how the next generation of advisors will respond to that environment, especially as they build practices for a firm that gives a significant portion of its cashflow away to a passive investor. It is one factor that could introduce difficulties into the service business model that defines the industry, according to Tibergien.
“It’s not like a muffler shop, where people are interchangeable,” Tibergien said. “In this business, people are critical.”