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How Merchant’s influence in the RIA market is growing

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Merchant Investment Management’s inroads — and influence — in the RIA market continues to grow.

Earlier this summer, Merchant launched a capital lending division, with a boost from Fidelity Investments, to go along with its asset management arm, minority ownership stakes in over a dozen RIAs, a company to help transition breakaway brokers and partnerships with firms that offer compliance and outsourced accounting services.

Now two former Envestnet executives, Jay Hummel and John Phoenix, are partnering with Merchant to launch Wealth Advisor Growth Network, which will offer practice management and consulting services to RIAs as well as capital investments in growing regional firms.

“RIAs need to look more like private banks to meet the changing expectations of customers,” says Hummel, a former managing director at Envestnet who,earlier in his career, served as president of Lenox Wealth Management in Cincinnati. “We want advisors to do more for their clients by providing a wider variety of services such as lending, insurance and risk management.”The new Denver-based firm hopes to create a network of regional firms and “build scalable infrastructure at these hubs so we can roll small- to middle-sized advisors into them over time for succession and scale,” says Hummel, who was also head of the Personal Investor Solutions business at American Century Investments.

“We will only take small equity stakes or revenue share with the firms,” he explains. “But our goal, unlike the current models out there, is to serve as operating partners in the businesses.”

New York-based Merchant’s relationship with Wealth Advisor Growth exemplifies its expanding impact in the RIA world.

We have multiple capital partners that will invest with us.
Jay Hummel, Wealth Advisor Growth Network co-founder

“We picked them as our key partner because we are involved with some of the firms they already own and Merchant see us fitting into their ecosystem very well,” Hummel says. “Merchant wants to enhance their practice management capabilities to support their current and future firms and we will play a key part in that.”

Merchant is expected to take a minority equity stake in WAGN by the end of the year, and the firms plan to collaborate on mergers and acquisitions, lending services and capital investments in regional RIA hubs, Hummel says.

“We have multiple capital partners that will invest with us in the hubs,” Hummel says. “Some of those firms may be in partnership with Merchant and others may not be, depending on the situation.”

Some industry executives have raised questions about Merchant’s dual roles as an investment manager and part owner of advisory firms.

Merchant currently holds minority stakes in 15 RIAs but will only disclose the names of four: Summit Financial in New Jersey, Magnus Financial Group in New York, Apollon Wealth Management in South Carolina and Inscription Capital in Houston.

Some industry executives have raised questions about Merchant’s roles an investment manager and service provider while at the same time being part owner of advisory firms who may be recipients of those services.

Such a relationship is “rife with conflicts of interest,” according to industry attorney Brian Hamburger, who heads MarketCounsel, a compliance firm that competes with Merchant-backed Advisor Assist.

Hamburger contends that if Merchant has an ownership stake or share of a firm’s revenue, it has a financial incentive to recommend that advisors choose an investment or service offering that benefits Merchant.

“By buying into companies and simultaneously furnishing other services such as accounting, investment management and compliance, you have a created a conflict of interest,” he asserts. “You can disclose [the relationships], mitigate them or avoid them.”

Open architecture is a really important principle for us.
Marc Spilker, Merchant executive chairman

Merchant declined to directly address Hamburger’s claim. But in an earlier interview, Merchant executive chairman Marc Spilker said that RIAs partnered with the firm “have no obligation [to use Merchant products].Open architecture is a really important principle for us.”

Spilker, a former Goldman Sachs partner, co-founded Merchant in 2017 as an outgrowth of GPS Investment Partners, a family office and private investment partnership he and two other former Goldman partners launched in 2015.

When asked about the conflict issue, Summit CEO Stan Gregor said “if there was a potential conflict, we would shut it down. Merchant has never, ever come to us with anything like that.”

Nor is Wealth Advisor Growth Network obligated to recommend Merchant-backed companies, Hummel says. In addition to consulting fees and income from RIAs Wealth Advisor Growth has invested in, Hummel says his firm will get paid by sharing revenue with vendors selected by WAGN’s clients.

“We have created a curated list of providers we are calling network partners in 10 key areas where we think outsourcing for a firm is beneficial,” he explains. “We have picked what we feel is the best vendor in each category and firms we have long-standing experiences with. As we help advisors optimize how they use these vendor partners, the partners will pay us revenue share.”

WAGN will not mark up the vendor services, “unlike other models,” according to Hummel. “The advisor pays the same they would have paid off the shelf, gets our expertise and the vendor partners get access to a new distribution network,” he says.

While this Merchant business line appears to be competing directly with Dynasty Financial Partners’ platform model, Louis Diamond, executive recruiter of financial advisors at Diamond Consultants, says the market can accommodate both firms.

“I think there’s a lot of room for competing options,” Diamond says. “Some RIAs will want everything from one shop, while others will just want bits and pieces of what Dynasty offers. I think Merchant is appealing to a different subset of the industry.”

Merchant’s connection with Fidelity Clearing & Custody Solutions, forged this summer, makes industry consultant Tim Welsh bullish about the firm’s prospects.

“Anytime you get backed by Fidelity then you have a tremendous advantage over everyone else in the marketplace,” Welsh says, referring to the company’s lending business. “Advisors — particularly the multibillion dollar ones — are typically shy when it comes to working with new vendors, so that partnership with Fidelity will go a long way to shortening the sales cycle for Merchant.”

As for WAGN, Welsh notes that as RIAs become true enterprises with multiple offices and hundreds of employees, “their management capacity and span of control create new challenges that they have never had to manage before. Thus, providing advanced practice and business management resources, expertise and consulting will be highly valued.”

Indeed, Merchant’s widening array of services are, according to Welsh, “almost akin to a put option on their loans. Well run businesses, like the Lannisters in ‘Game of Thrones’ always pay their debts.”

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