Two well-known wealth management firms with combined assets of nearly $10 billion — one a rising industry power and the other a fallen one — are combining to form yet another RIA mega-firm.

Pathstone Federal Street, itself the product of a $6 billion blockbuster merger between Pathstone Family Office and Federal Street Advisors earlier this year, has agreed to acquire the assets of Convergent Wealth Advisors from City National Bank. Terms were not disclosed.

"This is a big deal," said Brian Hughes, CEO of Hughes Growth Strategies, in an email. "It positions the newly combined enterprise to compete with firms of similar scale, such as Aspiriant, BBR and 1919 Investment Counsel, to name a few. This acquisition gives Pathstone a true national footprint, and bails City National out of the liability of a declining asset."

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Steve Braverman, Pathstone's co-CEO, is a highly visible industry figure and has steadily been building and growing his firm for the past decade.

The economics of the deal are "very favorable" to Pathstone, while City National, which is owned by the Royal Bank of Canada, can "cuts its losses and write off some not insubstantial good will," according to wealth management consultant Jamie McLaughlin. Convergent also gives Pathstone, a family office-oriented RIA catering to wealthy families with investable assets over $20 million, "critical mass in two large and underserved markets in Washington DC and Southern California," McLaughlin says.

A TALE OF TWO FIRMS

Led by a trio of well-known industry veterans, Boston-based Chairman John LaPann, New Jersey-based co-CEO Steve Braverman and Atlanta-based co-CEO Allan Zacharia, Pathstone is considered one of the more dynamic firms in the wealth management space catering to UHNW clients. Braverman in particular is a highly visible industry figure and has steadily been building and growing his firm for the past decade.

Convergent has gone in the opposite direction.

The wealth management firm, once an industry leader, was rocked by a scandal two years ago following the suicide of its CEO David Zier. It turned out Zier was running a private fund, Zier Asset Management, on the side. Although the fund was run outside of Convergent, the firm monitored Zeir's reported trades. Zier's suicide came after questions surrounding irregularities in the fund came to light.

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"The deal is potentially good for everybody," says Convergent's founder Steve Lockshin.

The fallout was brutal: advisers fled and Convergent's AUM fell from $8.6 billion in 2013 to around $3 billion this year. Convergent's founder Steve Lockshin — one of the industry's rock stars — resigned as chairman in late 2014. The move had been part of a "planned transition" since Lockshin sold Convergent to City National bank in 2007, he said at the time, but was "accelerated by the unfortunate recent events."

Industry observers quickly predicted that City National would put the wealth management firm up for sale. Braverman pounced on the opportunity, and Pathstone is expected to complete the transaction in this year's fourth quarter.

Both the Pathstone-Federal Street merger and the Convergent acquisition were financed by Mark Hurley's Dallas-based Fiduciary Network.

REDEMPTION FOR CONVERGENT?

"The deal is potentially good for everybody," says Lockshin, whose contract with City National expires this year. He currently heads the UHNW firm AdvicePeriod. "Steve Braverman is a fiduciary and runs a solid business. For a possibly very attractive price, Pathstone was able to add clients, revenue and advisers. Convergent needed leadership and an opportunity to attract and close new business."

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Pathstone is now "potentially positioned" to compete with Goldman Sachs, JP Morgan, other private banks and top-tier RIAs, says Brian Hughes, CEO of Hughes Growth Strategies.

Pathstone also picks up Convergent President John Elmes, an experienced UHNW market executive who made his name at GenSpring Family Offices and most recently worked at JP Morgan Private Bank before joining troubled Convergent last year.

Pathstone also gets "immediate operating leverage, as well as talent,” McLaughlin says

The deal gives Convergent a degree of redemption, according to McLaughlin.

"It gives Convergent a chance to heal and rebuild with great, non-client-facing infrastructure they could never have added organically and a strategic vision they never possessed until Elmes arrived," McLaughlin says. "Their precipitous fall from grace is arguably the greatest fall among like-kind firms serving the UHNW market."

POTENTIAL POWERHOUSE

Indeed, combining Pathstone and Convergent creates a potential wealth management powerhouse serving approximately 300 wealthy client families with around 100 professionals around the country in offices including Boston; Atlanta; Fort Lee, N.J.; Los Angeles; Naples, Florida.; and District of Columbia.

The deal also underscores the growing size of RIA mergers, as cited in DeVoe & Co.'s mid-year report: the average size of an advisory firm seller has increased 54% in three years and is now over $1 billion in AUM. Pathstone is now "potentially positioned" to compete with Goldman Sachs, JP Morgan, other private banks and top-tier RIAs, says Hughes.

"The only question that remains is can they transition this inorganic growth into increased margins and eventually build a sustainable model for ongoing organic growth and future success," he notes.

'WHEN THINGS GO SOUTH…'

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Beyond organic growth, one of the greatest challenges for wealth management firms "is the scarcity of talent to successfully serve high-net-worth families," says Hughes Growth Strategies' Brian Hughes.

Hughes cites GenSpring’s troubles after being acquired by SunTrust Banks. "They were never able to transition the number of acquisitions into an integrated culture," he says, "where their branding, positioning and messaging was consistent across all offices."

Other wealth management acquisitions have also failed to meet their potential, Hughes notes.
Pathstone must make sure the combined organizations are on the same page, he cautions. "What is the new firm's story and will it resonate and be differentiated in a marketplace where seemingly commoditized offerings compete in an increasingly crowded landscape?"

Beyond organic growth, one of the greatest challenges for wealth management firms "is the scarcity of talent to successfully serve high-net-worth families," Hughes points out.

"And when things go south, as they did for GenSpring," he says, "the talent doesn’t just walk out the door, they sprint!"

Charles Paikert

Charles Paikert

Charles Paikert is a senior editor with Financial Planning, a SourceMedia publication.