Working relationships
Consolidation in the financial planning industry leads small firms to affiliate with larger companies
Robert Fragasso is expanding his Downtown investment firm in a way that’s aimed at keeping smaller wealth management firms around during the massive shift in the financial advising industry where smaller firms are being eaten by bigger ones or forced to compete at a disadvantage.
“A lot of these smaller practices won’t be around five or 10 years from now unless they can marshal larger resources. We can offer that to them for a fair share,” said Mr. Fragasso, chairman and CEO of Fragasso Financial Advisors, an independent wealth management firm with $2 billion in assets under management.
The financial planning universe has been undergoing a dramatic change both nationally and locally in the past few years due to consolidations that have taken the form of outright purchases, partnerships, and affiliated financial adviser arrangements such as the one Mr. Fragasso has put in place.
His firm will let smaller independent advisers plug into its resources so that Fragasso handles many of the small firm’s back office duties like client investment portfolio management and compliance, which can be a drain on time and capital and doesn’t generate revenue.
“An independent practitioner runs like a hunted animal,” Mr. Fragasso said. “He is chased by his administrative duties. He’s chased by his clients. He its chased by regulatory agencies, where he has to handle all of the reporting. He has to figure out the software. He has to come up with capital to put new and improved resources to play in his practice.
“That’s a pretty big lift for one or two or even four people in an office,” he said.
Green Tree advisers Jodi Amos and Newlin Archinal would not have been able to launch their independent firm in March 2020 if they hadn’t affiliated with Commonwealth Financial Network, a Waltham, Mass.-based investment firm with $130 billion in assets under management.
“We wanted to have the resources of a major financial institution like a BNY Mellon trust
department or a PNC wealth management department, and the only way to do that was to partner with a larger firm like Commonwealth,” said Ms. Amos. She said their company — 4Rivers Wealth Management — has $90 million in assets under management after 16 months.
While they own the firm, they pay a fee to Commonwealth for access to its resources, which include 30 investment analysts and a dozen lawyers who come in handy with complicated and time-consuming jobs like investment research and advanced tax and estate planning. Commonwealth also provides their email, cybersecurity and website hosting.
“We love that we spend less time fixing tech issues and managing vendors and more time in front of our clients helping them reach their goals,” Ms. Archinal said.
In May, Franklin Parkbased asset manager Snow Capital joined
Snow Capital, with $1.6 billion in assets under management, will maintain autonomy in how it operates. But after 30 years in business, its founder, Edward Snow, 64, felt it was time to let a larger company provide back office systems and support while its staff focuses on clients.
Not all of the big firms have smaller firms on their radar. Hefren-Tillotson, the largest independent financial planning firm in the Pittsburgh region with $17 billion in assets under management, has no merger and acquisitions plans in the works.
“Hefren- Tillotson’s growth has been primarily driven by internal development of our people. We have not been active in local consolidation,” said Kimberly Fleming, chairperson.
‘Record consolidation’
In the first half of this year alone, there has been a record 101 mergers and acquisitions across the country involving financial advisory firms, according to DeVoe & Co., a San Francisco-based consulting firm and investment bank specializing in wealth management companies.
“A few short years ago, 100 transactions had not occurred in an entire year,” the company said in its second-quarter report.
In May, Franklin Parkbased asset manager Snow Capital joined forces with a Boston wealth management company — Easterly Investment Partners — to handle all of the local firm’s back office operations, as well as its sales and marketing in a 50-50 revenue-sharing arrangement. Another major driving force behind all the deals has to do with the aging population of advisers. The average age of a financial adviser is 57, and many owners of small firms are using consolidation as a retirement and succession plan.
But private equity investors are providing a significant amount of the capital that’s fueling the M&A activity in the wealth management industry.
“Private equity wants in this industry because of all that steady predictable income. They love those assetbased fees. It’s like a giant high-paying passbook savings account for these guys,” said Jeff Benjamin, a columnist at InvestmentNews, a New Yorkbased investment industry trade publication.
He said the affiliated adviser trend is growing because financial advisers don’t have enough hours in the day to deal with clients and all of the back office issues.
“You can still be your own brand, but you are getting support from the bigger firm,” Mr. Benjamin said. “They help with the smaller firms’ custody relationship. They help with marketing and make the small firm look a bit sharper. In return, the smaller firm gives the the big firm a little something for that.
“The trends on all the data are saying the same thing,” he said. “It’s just screaming record consolidation from here to breakfast. There’s nothing really standing in the way of this. The thing I’m waiting for right now is consolidation among the consolidators.”
The ‘roll-up’ model
Paul Brahim, former CEO of Downtown-based BPU Investment Management, chose the “roll-up” model. In other words, he rolled his company, which had $1 billion in assets, into the larger Wealth Enhancement Group, a company with $45 billion in assets under management.
BPU was the private equity firm’s first $1 billion firm acquisition in March 2020. Mr. Brahim bought an ownership stake in Wealth Enhancement Group with some of the sales proceeds and continues to work for the company advising clients. But he’s no longer responsible for running a company.
“At BPU, I only had two arms and two legs and 24 hours in a day,” Mr. Brahim said. “It was a capacity issue. All I do is take care of clients now. I don’t have to worry about any of that other stuff.
“We started BPU as a small firm, and it grew,” he said. “By the time I made the transition to Wealth Enhancement Group, the Csuite had expanded to a CEO, a COO, a CFO, a CIO and a chief compliance officer.”
Mr. Brahim said he considered going the affiliated route, but he chose to do the roll-up sale because he could eliminate the administrative duties altogether that way.
‘Betting on ourselves’
When David Root started his wealth management company in 1994, he affiliated with Commonwealth Financial Network. Commonwealth handled all of his back office operations up until six years ago when his firm, DBR & Co., severed the tie and began using individual vendors to provide the resources necessary to run the company.
He contracted with Charles Schwab to handle the buying and selling of securities on behalf of his clients, and he sought out vendors for the other services that make the business run, such as compliance, accounting, legal, payroll, human resources, all the various insurances and recordkeeping services.
“We were betting on ourselves,” Mr. Root said.
Mr. Root said DBR & Co. has continued growing at a double-digit rate since the split with Commonwealth. The firm has $1.1 billion in assets under management with individual clients and another $6.5 billion in assets under advisement with 401(k) and other corporate and nonprofit retirement plans.
The company acquired two more firms — in 2018 and 2017 — and although it hasn’t started an affiliated adviser unit, Mr. Root said he is in discussions with two small firms that are interested in affiliating with DBR & Co.
After six years working as a senior vice president at Fragasso Financial Advisors, Robert Yelenovsky struck out on his own in September 2019 and started a financial advising firm called The Investment Advisory Group, which is an affiliate of Fragasso Financial Advisors.
“I wanted the freedom to run my own company and still have the great tools available at Fragasso,” said Mr. Yelenovsky.
His firm, headquartered in Foster Plaza in Green Tree, is building a niche with individual investors who aren’t starting with large amounts of cash.
That means his clients’ portfolios are designed by a professional portfolio manager at Fragasso Financial Advisors even if their account balance is lower than the minimum required for an account handled by financial advisers at Fragasso.
Fragasso provides him with all the software he needs to run his practice for a fee, which frees him from making a capital investment that could amount to about $150,000 annually.
“They’re not employees of ours,” Mr. Fragasso said. “They are simply plugging into all of our resources so that they can run their business effectively, paying attention to the most important things.”