Baird's deal for $18B firm points to consolidation, potential recruiting fights

While a big wealth manager and a midsize firm it agreed to acquire aren’t sharing many details about the deal, it’s only the latest example of a brokerage opting to fold into a larger partner.

Baird reached a deal to purchase Pittsburgh-based Hefren-Tillotson for an undisclosed amount, with more than 90 financial advisors currently managing $18 billion out of six branches expected to join the acquiring firm by October after a scheduled close in June, the firms said earlier this week. After the agreement adding up to Milwaukee-based Baird’s largest deal since acquiring Hilliard Lyons in 2019, the firms didn’t make any executives available to discuss the transaction.

While such notable deals have been increasing in volume and size at a record level for at least eight years in a row across wealth management, such acquisitions often start a recruiting fight to retain advisors from the incoming firm, a custodial transition and the shuttering of the sellers’ brokerage. In fact, the number of brokerages declined by 17% to 3,435 between 2013 and 2020 amid the industry’s consolidation, according to the Investment Adviser Association and National Regulatory Services.

Baird’s deal to acquire Hefren-Tillotson isn’t surprising, especially given the earlier Hilliard Lyons transaction, said John Eubanks, a director of investment bank Park Sutton Advisors, which represents RIAs and other practices in M&A deals.

“The ones that are like Baird have to continue to grow, and the best way to do that is to acquire broker-dealers where they can consolidate operations, cut costs and gain scale and efficiency so those broker-dealers remain profitable,” he said. “The broker-dealers that are big enough and have the scale to remain profitable can acquire smaller broker-dealers. It reduces the operational cost and so there's margin expansion. They gain profitability in doing that, and they also add to the RIA business when they're acquiring a firm that has both, like Hefren-Tillotson.”

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Like Baird, Hefren-Tillotson is a W-2 employee advisor firm and its RIA and brokerage will merge into those of Baird following the close of the deal, according to Baird, which will be custodian for all of the client assets as well. The parties haven’t said whether Baird will pay retention bonuses to advisors who remain through the transition and how many of Hefren-Tillotson’s corporate employees the acquiring firm intends to retain after the deal.

Representatives for Hefren-Tillotson, which currently uses BNY Mellon’s Pershing as its custodian, didn’t respond to requests for comment.

Representatives for Pershing declined to comment. Although it’s one of the industry’s largest custodians and added a record $161 billion in net new assets under custody or administration in 2021, Pershing has lost a great deal of business recently to LPL Financial due to three mega recruiting moves in the bank and credit union channels and an M&A deal that saw Waddell & Reed’s wealth manager change hands.

Similar to LPL, Baird is a self-clearing firm that primarily uses the firm’s own custodian, although it does have a clearing arrangement with Charles Schwab for certain mutual fund families, according to the firm’s SEC Form ADV brochure. That means Hefren-Tillotson’s advisors and clients will change their custodian, in addition to switching their brokerage to Baird’s entity. Brokerages that fold into larger firms in acquisitions either wind down or get repurposed to limited-use entities. The consolidation can lead to job losses, as in the case of more than 200 corporate employees of Waddell & Reed who received severance offers after the LPL deal.

As a 74-year-old firm, Hefren-Tillotson has 271 employees, including 175 who are registered representatives, 151 who are investment adviser representatives and 101 who perform investment advisory functions including research, according to its most recent Form ADV from late August. Representatives for Baird didn’t immediately say why the amounts of reps and IARs listed there are different from the more than 90 referenced in the companies’ announcement.

The retention fight to keep the advisors in-house through the transition always prompts the question of whether the acquiring firm will pay a bonus to the brokers who stay after the deal.

Baird will make the case to the incoming brokers that its resources will enable them to attract and retain clients, and any retention bonuses don’t need to add up to “total fair market value” like traditional recruiting offers to convince them to take the easier path of joining Baird, recruiter Mark Elzweig said in an interview.

“Some of the very small firms are having a hard time with providing their advisors with cutting edge technology and keeping up with all of the latest developments or upgrades to advisor platforms,” Elzweig said. “That will be good enough for a lot of their advisors to give Baird a look-see. They'll probably have to offer them something because, if they have reasonable production, all of those advisors will have a lot of options.”

To Elzweig’s point, the parties are promoting Baird to the potential incoming teams with a message revolving around the new resources for greater scale and client service.

“When we looked at Baird and we said, ‘Look at how our values line up and our mission statements are almost identical.’” Hefren-Tillotson CEO Kim Tillotson Fleming said in a video about the deal that Baird posted on YouTube. But we also see the benefit that we have in seeing the capabilities that Baird can bring, that a larger firm can bring that also is employee-owned but has even more resources for our people to be able to serve clients well and feel like they really have the right capabilities in their hands. One of the things that’s important to us is, from the client standpoint, that things really aren’t changing.”

Regardless, the wealth management M&A marketplace will likely set records again in 2022, as long as the Fed’s decisions about interest rates don’t roil equity values too much this year, according to Eubanks of Park Sutton. The firm advised on 25 transactions last year, up from 16 in 2020. He compares the volume of RIA M&A to that of independent insurance brokerages, which have been consolidating for a longer time and continue to turn over. Stock prices won’t likely make an impact on the succession planning, outside capital and RIA growth currently driving the large flow of deals, Eubanks said.

“As long as interest rates stay low and capital’s cheap, and the market doesn't really continue downward, everything else underlying these wealth management firms — all these changes — will drive consolidation,” Eubanks said. “I think we have another seven to ten years, really.”