A new player is emerging in the financial services industry. Several "consolidator" firms are buying up independent financial advisers and promising to deliver some of the efficiencies and camaraderie of a traditional firm-as well as facilitate an exit strategy for retiring reps.

Among the main consolidators are National Financial Partners (NFP), a New York firm backed by Apollo Management LP; Highland Capital Holding Corp. in Birmingham, Ala., funded by insurance firms; Assante Capital Management in Winnipeg, Manitoba, Canada; and Century Business Services, a public company (symbol CBIZ) based in Cleveland.

So far, it's too soon to tell how the roll-up of independent advisers will work out. Advisers who've sold have seen few drawbacks. However, it's conceivable consolidator firms will at some point seek to standardize operations and even distribute proprietary products-something that could irritate independent shops.

Consolidators emphasize the efficiencies they can bring to an independent shop-their buying power, operational support, and networking and referral opportunities among jointly owned firms.

Then there's the money. A roll-up of 200 practices with 200 million dollars in revenue might be worth three to four times revenues as a public company, says Len Reinhart, head of Lockwood Financial Group, an investment management consulting firm in Malvern, Pa. That is a significantly higher valuation than an independent practice alone.

Not only can advisers profit by selling out to a roll-up firm, but they can also better arrange to sell their practices upon retirement (see "Buying or Selling a Practice," Page 74).

Roll-ups are a big enough trend that Linsco/Private Ledger announced earlier this summer that it planned to go public. The firm plans an IPO sometime in 2003. Observers of the roll-up trend say that LPL's move was a competitive response to the consolidators.

Why the interest among roll-up firms in acquiring independent shops? "In the past, the mutual fund company or money manager was where value resided," Reinhart says. "With the transition of money from institutions to individuals, the value of the market is in the high-net-worth individuals" served by boutique advisory and planning shops, he says.

There is risk in selling out, however. Consolidating several hundred standalone firms would be "valuable for financial institutions looking for distribution," Reinhart says. He adds a warning that while consolidators "don't have proprietary products now, as they evolve, they will start to develop them."

But so far, NFP, for one, has been completely hands-off, says Bob Keys, who runs Private Consulting Group in Portland, Ore., which was acquired by NFP in January. Since the deal went through, "there have been no changes whatsoever," he says.

Here's a rundown on the players.

National Financial Partners NFP, led by president and CEO Jessica Bibliowicz, has acquired close to 50 financial services firms in 14 states from April through August of this year. Its goal is to have 300 firms by the time it plans going public in three to five years. Backed by 125 million dollars from Apollo Management LP, run by takeover king Leon Black, NFP is acquiring independent financial services firms with minimum revenues of more than 1 million dollars.

"The tactic is to build a financial services distribution company through consolidation," Bibliowicz says. "We focus on companies that specialize in high-net-worth-financial planning, estate planning, insurance, corporate benefits."

"It will be an attractive IPO for a number of reasons," Keys says. "There are the potential synergies of 300 to 400 people. NFP will facilitate the sharing of ideas and promote joint work among firms. And there's combined buying power when they design a product."

Bibliowicz says NFP won't manufacture products, but will work closely with outside vendors and build internal capabilities to add value. Among major firms acquired by NFP are Windsor Insurance, a life insurance distribution firm, and PartnersFinancial, a producer group. Both are membership organizations with about 160 firms in each.

Acquired firms retain their independence, Bibliowicz says. "We have a saying: The day before the transaction is the same as the day after."

Highland Capital Holding Corp. Highland Capital Holding Corp. takes a more franchise-like approach. Russ Alan Prince, who runs Prince & Associates, a financial consulting firm in Shelton, Conn., has consulted for Highland. He says its model "consolidates technology, training, legal issues and accounting systems."

Since its inception in early 1998, Highland Capital has acquired 10 firms and plans to add 15 more by the end of the year. The firms provide "a combination of business succession planning, estate planning, retirement planning, employee benefits, executive compensation and asset management," says Highland Capital President and CEO John Robinson Jr.

With a three-year IPO strategy, Highland Capital's goal is "to be in every major market within three years, with about 100 firms," Robinson says.

In September 1998, Highland Capital acquired Capital Strategies Group in Birmingham, Ala., an estate planning, business succession and employee benefits firm in which Robinson is a founding principal. David Byers, managing director of Capital Strategies, says Highland Capital reinvests in advisers' practices.

"We get the benefit of using that revenue to pay expenses," Byers says. "Highland's attitude is: We want to help you take your business to the next level. Tell us what you need-technology, management of business or cross referrals from other groups."

Highland Capital has been negotiating strategic alliances with banks and accounting firms, and devoting resources toward making those alliances work, Byers adds.

Assante Capital Management Assante Capital Management has been acquiring CPAs and business management firms that cater to entertainment and sports stars. By the end of the year, Assante plans to work deals with financial advisers, too.

John Bowen, CEO of the U.S. side of Assante in San Jose, Calif., says the firm provides an adviser with the ability to sell a portion of the firm and keep control, or later sell the balance of the firm. "[By getting stock and cash for their practices,] they can start participating in their success," he says.

"We buy a piece of the adviser, help them with capital, give them platforms for operations, sales and marketing so they can grow dramatically," Bowen says. Assante has used the same business model in Canada, which includes networking opportunities. "We create presidents' councils [for advisers who] want to take advantage of synergies with each other."

An advantage to Assante's model: "If there's a death or disability, we're under contract to buy the firm," Bowen says. And Assante is already a public company. The attraction for advisers is that they "get to participate in the growth of a larger entity," he adds.

Century Business Services Century Business Services is acquiring a variety of business services firms, including accounting, benefits, insurance, valuation and wealth management. Target clients are small- to medium-size business owners.

Rob O'Byrne, who runs benefits and insurance services for Cleveland-based Century out of Kansas City, Kan., says the firm has acquired more than 100 businesses in total, including 30 benefits consulting firms. About half of the benefits firms have a significant degree of "wealth management" services (financial planning for owners, managers and employees). "Probably another 25 accounting firms have some form of wealth management," he says.

Century is purchasing firms with more than 1 million dollars in revenues. "They've achieved historic growth of 15 percent to 20 percent annually, and they're very profitable and creative," O'Byrne says. "Also, they hear from their clients that they want expanded services."

In December 1998, the firm announced an alliance with Merrill Lynch in which Merrill products and services are offered to Century clients. For example, Merrill will handle financial planning in areas where Century has no presence.

Century is setting up what it calls BIZ Centers nationally to provide one-stop shopping for business owners-"basic things like insurance, accounting, payroll, valuation, information technology consulting and wealth management," O'Byrne says.

Trendy Idea or Cracking the Code? Is rolling up independent financial services firms a viable long-term business model? The jury is still out. However, the roll-up trend may have something to do with the hot market and the trendiness of creating "strategic alliances" between different types of advisers. "The best deals are being made now," Prince says. "In five years, I have no idea. One of these things could blow up, or markets could turn really bad."

Bibliowicz is thinking beyond the next market turn, however, and sees consolidators as the high-end firm of the future. "[Consolidators] have cracked the code between the interests of the entrepreneur and the way to build a premium financial services distribution company," she says.

About a year and a half ago, Joel Baker, president of FFR, a financial and estate planning firm in Buellton, Calif., wasn't even thinking about selling his firm. But three consolidators, including the winning bidder National Financial Partners (NFP), approached him.

"The person [from NFP] who approached me knew me well and asked if I was interested in making improvements in the quality and type of work I do," Baker says. One benefit that stood out: "It allows you to capitalize your business."

NFP was more attractive to Baker than the other two consolidators in part because it "had the cash in the bank" from Apollo Management LP. Effective Jan. 1, 1999, Baker struck a deal in which NFP capitalized 40 percent of FFR's earnings, paying him five times the value in NFP stock and cash.

The capital allowed Baker to form a broker/dealer with a group of financial advisers. Baker is a senior managing director of the b/d, Private Consulting Group, which caters to the needs of high-end clients. He and his partners in the new firm can now afford to develop and research unique products and services-something they couldn't do on their own.

As part of the NFP deal, Baker signed a five-year noncompete agreement. "Before you get into a marriage, you have to do research and understand all of the ups and downs," he says.

Have there been changes to the firm? "NFP has left us alone completely," Baker says. "NFP doesn't want to run our business. But they'll help us with capital if it makes good business sense."

So far, so good. "In the first seven months, it's been fantastic," Baker reports. "They do everything they say they're going to do."

One of the benefits consolidators promote when folding a practice into a larger firm is the better opportunity to either sell a practice or buy other practices.

At National Financial Partners (NFP), a New York consolidator, advisers can groom their own successors, sell their portion of the business to another NFP rep, or even buy another NFP rep's business. Reps say the advantage is that the advisers are part of a network of advisers who have similar styles of doing business. NFP will help facilitate the transfer.

David Byers, a principal with Capital Strategies Group, sold his Birmingham, Ala., practice to a local consolidator, Highland Capital Holding Corp. "When I retire, I'll have stock in Highland Capital. Between that and the deferred-compensation program Highland Capital will establish, I don't have anything to worry about." He anticipates his Highland stock will be worth more than what he could sell the practice for at retirement. "It's an advantageous exit strategy."

Highland Capital President and CEO John Robinson Jr. says the firm is not looking for solo producers seeking an exit strategy, but when the time comes for retirement, the firm will help facilitate a succession plan.

NFP operates the same way. It does not buy firms as an exit strategy for owners, says President and CEO Jessica Bibliowicz, yet retiring advisers have some options. "We encourage firms to do their own succession planning." That plan could involve a transition to a family member or to another NFP firm.

In a typical acquisition deal, advisers will sell all of their practice for a stake in the larger roll-up company, but retain control of the business and continue to draw a share of revenue.

At National Financial Partners (NFP), a valuation is done on the practice. Then the firm's owner and NFP agree on a percentage of the firm that NFP will capitalize. NFP might pay five times pretax income on that portion. (The income figure is calculated before owners' compensation is deducted.) For example, for a firm with 2.5 million dollars of income, NFP might capitalize 40 percent of the business (1 million dollars) at a multiple of five (5 million dollars to owner), and pay one times income on the remaining 60 percent of the business (1.5 million dollars to the owner). Then, in the future, the firm principal gets 60 percent of his pretax income and NFP gets 40 percent.

Sellers must take at least 20 percent in stock. "We try to get everybody's economic incentives lined up," says NFP CEO Jessica Bibliowicz. "Then we form an LLC for them [and] sign a management agreement that states they will continue to run the business forever as they see fit."

At Century Business Services, acquired firms exchange 100 percent ownership for a stake in Century. Rob O'Byrne, who runs benefits and insurance services for Century Business from Kansas City, Kan., emphasizes that each deal is different, but most transactions are 60 percent stock, 40 percent cash, based on pretax income.