New York, California and Texas will be ground zero for Fiera Capital, the $62 billion Canadian investment manager that is hoping to crack the top tier of  the U.S. private wealth market.

Fiera agreed to buy the $7.3 billion Los Angeles-based wealth manager Bel Air Investment Advisors, and the $2.1 billion New York-based asset manager Wilkinson O’Grady for a combined $156 million earlier this month. The deal is expected to close at the end of October.

The 10-year old Montreal-based firm expects nothing less than to become “a leading North American investment management firm within the next five years,” according to chairman and chief executive officer Jean-Guy Desjardins.

The U. S. ultrahigh net-worth build-out will begin with expansion in New York City, southern California and San Francisco and major cities in Texas, says Todd Morgan, senior managing partner of Bel Air, who will become chairman of the new Fiera Capital Private Wealth North American division. Donald Wilkinson, chief executive and chief investment officer of Wilkinson O’Grady, will become CIO for the new division.

Organic Growth, Formidable Challenges

“We’re going to start with organic growth, hire more advisors and add to our business development teams,” says Morgan a Goldman Sachs alumnus well known for his high powered connections in the entertainment industry. “We’re going to bring in both top-notch, experienced advisors and also advisors who we can train. We know a lot of people in New York, and Wilkinson O’Grady will give us a beachhead there.”

Fiera and Morgan will face formidable, but not insurmountable hurdles, say industry experts.

“Most of these deals go south over time,” warns veteran industry consultant Michael Kostoff, a partner at Rockville, Md.-based WISE Gateway. “The key to success is to retain talent and support and invest in talent.”

“Lots of firms are aspiring to be national in scope, but actually pulling it off is very hard,” notes Jamie McLaughlin, who specializes in counseling firms targeting the ultrahigh net-worth market. “Bessemer Trust has done it but there aren’t many others. Doing deals is not easy, and integration afterwards has been the undoing of many who have tried.”

Talent Top Priority

Fiera’s first order of business is keeping its top talent, industry experts say.

“At a multiple of around 9.5 with a big cash pay-out upfront, the deal seems pretty rich for the principals,” says one veteran wealth manager who has negotiated similar deals and asked not to be identified. “They don’t have much of a stake left [in Fiera] and it appears to be easy for them to walk away. And these are guys who have walked away from big financial institutions in the past.”

Morgan, Reed Halladay and Darell Krasnoff formed Bel Air after leaving Goldman Sachs in 1997. In 2001 they sold a majority stake to State Street but bought the firm back – at a reportedly lower price - five years later.

According to a presentation of the deal presented by Fiera to investors, Bel Air principals will receive $100 million in cash when the deal closes, $15 million cash in escrow to be paid over three years and $10 million in Fiera Class A shares to be issued over three years.

Sylvain Brosseau, president and chief operating officer of Fiera, points out that key Bel Air and Wilkinson executives will also sign employment agreements with four-year non-compete and non-solicitation clauses and receive up to $20 million in incentive-based performance share units that vest over five years.

Even more importantly, Brosseau says he expects Fiera’s “cooperative culture” to win over Bel Air and Wilkinson executives.

“Contractual agreements only go so far,” Brosseau says. “There’s no magical recipe to make people stay. But we believe when they see that they will be making an important contribution to help the company grow, and will be listened to, they will stay. And our track record of keeping executives who have joined Fiera from acquisitions is very good.”

Wealth or Asset Manager?

Industry skeptics also question whether Fiera, an asset manager with a strong institutional orientation, is really committed – or able - to grow a true wealth management business that includes offering full-service financial planning.

Bel Air’s profit margin, for example, based on revenue cited in the investors’ presentation of $32.7 million and EBITDA of $13.2 million, exceeds 40%, a relatively high number for a holistic wealth manager.

“Bel Air calls themselves a wealth manager, but they don’t provide a lot of planning,” says Tim Kochis, principal, co-founder and former chairman at San Francisco and Los Angeles-based Aspiriant. “That part of the business [planning] doesn’t have those margins.”

Morgan says Bel Air is in fact, “a very high touch” firm whose margins are a result of the cost efficiencies and scale that comes from leveraging Bel Air’s large accounts, which average close to $20 million, and sometimes exceed $100 million.

“It costs the same to manage $100 million as it does to manage $5 million,” Morgan says. “And Fiera is committed to being in the wealth management business. Those are our marching orders.”

Brosseau concedes that while Fiera would like to maintain a 40% profit margin for its new private wealth unit, it will be “more difficult with client service.”

Despite the extra expense, he says that ultimately the new unit will “have the scale to more than achieve that goal.”

Brosseau also cites Fiera’s acquisition of the Canadian wealth management unit of Societe Generale last fall.

“They were able to build business leads by offering financial planning to C-suite executives,” Brosseau recounts. “As a result of that relationship they received money to manage. It’s a business model we like and think can be successful.”

Private Wealth Vision

Bringing the Canadian wealth management unit, Bel Air and Wilkinson together over the next six to 12 months “to get acquainted, see what people have to offer and create a vision” will be Fiera’s first order of business, Brousseau says.

According to Fiera’s investor presentation, a critical “strategic rationale” for acquiring Wilkinson and Bel Air, which is also known for its $3 million-plus fixed–income business, is to expand the company’s scale in the “growing and high margin private wealth management segment.”

Indeed, Fiera estimates the deal will quadruple the company’s revenue distribution from private wealth to 36% from its current 9%.

Morgan expects that growth to continue.

“From a macro point of view, we see this period as similar to the early 2000s,” he says. “Growth in the markets is coming back and we are focused, have a deep bench with well qualified professionals and are ready to take advantage of a great opportunity.”

Fiera’s ace in the hole is Bel Air’s sales prowess, says Elizabeth Nesvold, managing partner of Silver Lane Advisors, the New York-based investment banking firm that advised Bel Air on the deal.

“They are extremely talented on the business development side,” Nesvold says. “Firms that are able to grow, like Northern Trust or BNY Mellon, are always good at building sales by putting resources into it. At the ultrahigh net worth level it usually takes three sales to get one really good client, and that takes money.”

“Bel Air is very, very good at hiring and sourcing prospects from different industries,” Nesvold adds, “and that’s a part of the business that baffles many people.”

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