While it didn't create much buzz when it happened in early August, the purchase of Lockwood Financial Advisors, the leading independent managed money platform, by The Bank of New York, could be a big deal for brokers and advisors. At a minimum, it points to even more intense competition for high-net-worth clients, and perhaps a greater challenge to wirehouse reps for this business. It also demonstrates how profoundly the brokerage industry is being remade into one focusing on full-service financial planning.

The terms of the deal were not announced, but people close to the companies say that BoNY paid in the neighborhood of $165 million. The transaction involves the purchase of LFG, the privately held parent of the Lockwood Financial companies, and its sister company, called EMAT, a managed account technology company. The sale itself was not unexpected; the 7-year-old managed account marketer had been subject of takeover talk for the last three years.

Still, it's an intriguing deal. For one — and this is the bad news for wirehouse brokers — it should arm the 1,000 or so independent registered investment advisors that make up Lockwood's network with more financial products. “We'll be able to access a greater breadth of product offerings, like alternative investments,” says Lynn Mathre, president of Asset Management Advisors, an independent RIA in Houston who uses the Lockwood platform. And, as Lockwood founder and CEO Len Reinhart acknowledges, his company needed the resources of a major financial institution to take his business to the next level. “Because the technology to do this right is so time-consuming and expensive, Lockwood needed someone with deep pockets,” says Mathre. “It's a win-win situation for the advisor and for Lockwood.”

Despite its fast growth, Lockwood, with $7.6 billion in assets, was largely one-dimensional in its focus on managed accounts. It had little to offer its affiliated advisors by way of alternative investments (just a managed futures product). Advisors who wanted other noncorrelated vehicles had to search them out themselves, with perhaps some guidance from Lockwood.

The upshot, say analysts, is that the BoNY connection makes Lockwood a much more attractive choice for independent RIAs. “They'll be able to go head-to-head with Fidelity and probably go right by Schwab,” says Kevin Keefe, senior consultant with Financial Research Corp. With a new world of BoNY products behind it, Keefe believes Lockwood will be better able to hold itself out as the one-stop financial services shop that advisors and their clients are starting to demand.

Although BoNY, with $76.7 billion in assets, is best known for its retail banking in the New York metropolitan area (it has 350 branches), it has a huge global securities services business (custody, lending, processing and clearing). BoNY also offers a range of services, including private banking. “BoNY is servicing customers throughout the entire investment lifecycle,” says Andrew Collins, an analyst at U.S. Bancorp Piper Jaffray. And, “BoNY continues to explore private banking-related strategies, competing against U.S. Trust, J.P. Morgan Chase, as well as those more brokerage-oriented organizations.”

The acquisition also signals BoNY's entry into the managed account technology arms race (see related article on page 55). In fact, BoNY's biggest motivation may have been to acquire the processing technology for managed accounts provided by EMAT, now an independent company but confounded by Reinhart.

According to Reinhart, increased competition in the processing business from the likes of State Street (which dominates the mutual fund processing business) and BISYS indicated that if managed account processing was heading toward a standard, similar to what happened in the mutual fund industry, EMAT had to get more resources behind it.

“EMAT by itself couldn't compete with the likes of those people,” says Reinhart. However, with BoNY's resources behind it and its technological expertise (it's estimated that BoNY will spend around $660 million on tech in 2002), EMAT's managed account technology stands a better chance of gaining wide acceptance. “The Bank of New York's forte is processing, so it seems a perfect fit,” says Robert Gordon, founder and president of Twenty-First Securities.

It's obvious why Lockwood wanted a deep-pocketed benefactor. “We were looking up at Schwab, SEI and Fidelity, and we had a long way to go to get there,” says Reinhart.

However, Stephen Winks, founder of the Society of Senior Consultants and publisher of Senior Consultant, believes Lockwood has some things working against it. For one, even Reinhart acknowledges that Lockwood's service is more expensive than its rivals are. And, Winks says, it is vulnerable to competing platforms, some of which are more sophisticated. “We know there are cheaper, faster and better models out there,” says Winks. “Was this a great time to sell? Yes. Was this a great time to buy? No.”

That's not to say that other deals to acquire managed account platforms won't follow. Lockwood's position was strengthened by its ability to get up and running and reach profitability before the market hit the skids. Competitors such as ADVISORport have not reached that point yet, but could be attractive for other reasons. ADVISORport, for example, has more flexibility than Lockwood when it comes to portfolio accounting and back-end custodian management, analysts say.

As smaller firms face bigger players with more resources, they must find ways to remain competitive. “It's hard to grow purely organically,” says Reinhart. Keefe says wirehouses have made efforts to ramp up a broader range of managed account services. Third-party providers will have to do the same. “I wouldn't be surprised if other third-party platforms have to look for the same types of relationships,” says Keefe.