In its earning call last month, LPL Investment Holdings shared strong performance numbers for fourth-quarter and full-year 2011. But many analysts on the call wanted to talk about something else - namely, LPL's acquisition of wealth management services and consulting firm Fortigent announced in January, after the reporting period.
"We absolutely have seen more calls from prospects to join us," Mark Casady, LPL Financial's chairman and CEO, said during the session. "We are already attracting very sizable RIA practices, whose characteristics are that of a hybrid. It is a very good area for us to enter and a good business for us to support."
Fortigent was serving around 90 advisor clients when LPL announced the acquisition, says Chip Roame, managing partner of research and consulting firm Tiburon Strategic Advisors. Fortigent, based in Rockville, Md., is known for its focus on higher-net-worth practices. The firm has roots in investment consulting, wealth management and performance-reporting solutions for family offices. Fortigent's broad range of high-tech software solutions includes unified managed account programs that give smaller high-net-worth clients access to the type of due diligence and research that has often been out of their reach. Fortigent's Access Overlay program allows clients to invest in diversified equity portfolios, and Access Alts allows for investment in alternatives, especially limited partnerships. Both types of platforms are growing in popularity among yield-seeking but capital-preservation-minded advisors.
"It's emerging as a trend," says Robert Testa, a senior analyst at research firm Cerulli Associates. "These platforms and databases are being used by RIAs and family offices increasingly."
Large third-party service firms have taken notice. If they don't already offer consulting services in alternatives, they are either developing those skills themselves or buying smaller firms that do. Last year, New York-based Mercer Investment Consulting beefed up its consulting capabilities in the private wealth market when it bought consulting and services firm Hammond Associates. Also, San Francisco-based Callan Associates hired four investment consultants for its alternatives, fund sponsor and defined contribution group last August. Callan Associates contributes its research to Dynasty Financial Partners' wealth management platform. Dynasty, in turn, is steadily signing East Coast RIA firms on to its platform, and recently announced plans to begin adding partners in the Midwest.
Moving On Up
The Fortigent acquisition is one piece of LPL's larger strategy to create a platform that can serve virtually any advisory business model, Roame says. LPL's last two large acquisitions since its November 2010 IPO have targeted firms that provide a range of wealth management services. Fresh off its IPO, it bought National Retirement Partners, which provides plan consulting, fiduciary best practices and investment due diligence to retirement plan sponsors and their participants. Last April, LPL Financial bought Concord Wealth Management of Matawan, N.J., to get a firm footing serving financial firms with trust groups. Concord also provides unified managed account services to advisors.
The vast majority of LPL advisors' clients are mass-affluent or middle-income Americans. That core demographic has powered the company's growth for almost all of its 40-year history, and the advisory market expects LPL to serve that group well. What the market may not know, Casady says, is that LPL advisors are among the largest high-net-worth asset managers in the U.S.
"There is a very sizable number of advisors [at LPL] who focus on high-net-worth clients or who have a few HNW clients in the middle of a broader practice," Casady says. The Fortigent deal could help change that perception of LPL as a specialist in advising mass-affluent clients. Certainly, large players in the RIA business who already serve high-net-worth clients have taken notice.
A Sharp U-Turn
"With the Fortigent acquisition, LPL has entered into a very attractive space in the industry," says Ron Carson, CEO and founder of Carson Wealth Management Group, based in Omaha, Neb. "Platform providers are a great way for advisors to optimize scale and efficiency while increasing transparency to the most important parties involved - their clients."
Carson Wealth Management oversees about $3 billion in client assets. It had planned to convert to the RIA model in mid-2011, then launch its own broker-dealer a few months later, citing shortcomings with LPL's technology offerings. In December 2011, just before moving forward and shortly before LPL Financial announced its Fortigent acquisition, the firm pulled the plug on its plan to launch the broker-dealer.
Representatives of both LPL and Carson Wealth Management say the January announcement and Carson Wealth's change of plans and the Fortigent acquisition were unrelated. Neither company offered specifics on what technological improvements LPL has in store.
Yet it is clear that a firm like Carson Wealth Management - and many other RIAs that serve high-net-worth clients - could benefit from Fortigent's expertise. Fortigent excels at transparency in precisely the areas that a lot of high-net-worth investors are interested in now, industry observers say. "For a long time, a lot of databases overlooked alternatives, and there was not a huge bench of research readily available to smaller RIAs and family offices," Testa says.
RIA firms and family offices do not generally have the personnel to conduct hedge fund due diligence internally. Also, some hedge funds need to do larger-scale business than individual RIAs can provide, Testa says.
"When a platform such as Fortigent comes along and is conducting manager and operations due diligence, hedge funds are more likely to give them a meeting or talk to them," Testa says. "It is almost like a clearinghouse for management research." Providers like Fortigent will succeed because they already do the operational due diligence as part of their investment consulting business, Testa says. "They quietly market the database services to RIA firms that would never take a consulting assignment," he adds.
Pay to Play
Beyond that, Fortigent also has set up feeder funds to single-strategy limited partnerships and other hedge funds, according to a Cerulli case study of the firm. The so-called access funds provide end investors with lower investment minimums, generally $250,000, into popular hedge fund strategies. This arrangement allows RIAs and other advisors to include alternative investment strategies in diversified portfolios. The fees are minimal, typically 10 to 75 basis points, which represent the costs of administering the feeder funds.
Yet the underlying funds within the Access Alts program still undergo Fortigent's rigorous due diligence. If a portfolio manager claims to have graduated from Harvard University, Fortigent will verify that. The firm will also dig into a manager's performance record and track how his or her investment philosophy has changed over time, Testa says.
"Fortigent is one of three to four vendors that has earned a strong reputation in the upscale RIA market," Roame says. "Firms looking to serve more high-end RIAs are likely to want to acquire or develop relationships with these firms."
Donna Mitchell is a senior editor of Financial Planning.