The already fierce battle among service providers and aggregators to win the allegiance of independent advisors is heating up, with new business models, strategies and unlikely alliances roiling one of the industry’s most competitive sectors.
Last week Dynasty Financial Partners, the wealth management platform led by Todd Thomson and Shirl Penney, scored a major coup by partnering with Lori Van Dusen’s LVW Advisors to provide research and potentially other services. The Rochester, N.Y.-based Van Dusen, who has nearly $5 billion in assets under advisement, made headlines earlier this month when she left Convergent Wealth Advisors to set up her own firm as part of one of the industry’s leading aggregators, Focus Financial Partners.
This month also saw the re-boot of yet another firm attempting to muscle its way into the crowded roll-up space. After a slow start last year, suburban Philadelphia-based Merion Wealth Partners hopes to gain traction with a new chief executive: the high-profile hire of Jim Barnash, a past president of the Financial Planning Association; the addition of newto the fold; and a business model based on showcasing financial planning over asset management. A fee structure based on retainers rather than a percentage of assets under management is also in the mix.
Dynasty’s unexpected deal with Van Dusen and Focus raised eyebrows throughout the industry. “We may be seeing the business model morphing before our eyes,” said Jeff Spears, chief executive and founder of San Francisco-based Sanctuary Wealth Services, which also competes for the business of independent wealth managers as a platform provider and business support partner.
Some industry observers believe Dynasty’s high–level industry connections and state-of-the art platform, when combined with Focus’ deep pockets and impressive track record as an aggregator, make for a powerful alliance, at least for firms like Van Dusen’s that target the high and ultra-high-net-worth market.
But for now, Focus and Dynasty, both dominated by high-powered personalities, still appear to be in the courtship phase. Dynasty is currently providing “purely” research capabilities to LVW, according to Focus chief executive Rudy Adolf. “Dynasty made a compelling proposal in this narrow but important area,” Adolf said. “If they prove themselves, there will be more opportunities to work with them. If they don’t, there are plenty of other vendors to choose from.”
Dynasty’s “Ideal Formula”
Dynasty sees things a bit differently. For now, LVW is using Dynasty’s institutional investment research platform, which includes firms like Callan Associates, Fund Evaluation Group and Strategic Investment Solutions. But LVW also “has access to” other components of Dynasty’s wealth management platform, such as trust services, lending and insurance, said Shirl Penney, Dynasty’s president and chief executive.
As for future ventures, Dynasty chairman Todd Thomson said “We believe that for some teams, the ideal formula would be to combine Dynasty’s comprehensive platform with the equity and operational or strategic support that might be provided by firms like Focus, Washington Wealth Management, AMG Wealth Partners and others.”
No matter what the future holds, both Dynasty and Focus are clearly on hot streaks. In addition to landing LVW deal as the sixth firm in its advisor network, Dynasty also added Risk Paradigm Group, a Chicago-based hedge fund that recently acquired RIA firms in Boston and Austin, Tex. And in the past two months, Focus has snapped up Boston-based Colony Group and Hufford Financial Advisors of Indianapolis, the firms’ fifth and sixth deals of the year, giving it a major stake in two dozen advisory firms around the country with combined assets of over $45 billion.
Also battling for the allegiance of “breakaway brokers” and wealth management teams and firms looking for a home (or a pay-out) are well-funded competitors such as United Capital and HighTower Advisors, which itself made a splash last week by hiring Ann Reider, branch manager of a $2 billion private client office of Morgan Stanley Smith Barney in suburban Chicago, to be branch manager of ’s Midwest territory.
Merion is hoping to elbow its way into this elite group after a rough start last October. Backed by funding from CDV Capital and Ash Investment Fund, Merion hoped to break out of the gate with multiple acquisitions and quickly reach $1 billion in assets. But a cornerstone early pact with a breakaway wirehouse team in Farmington, Conn., didn’t work out, and, a year after launching, Merion only has $100 million in assets and a partnership with just one RIA in Bethlehem, Penn., in addition to an affiliate agreement with another in Fort Wayne, Ind.
But that’s about to change, said Richard Hughes, the former co-president of Portfolio Management Consultants, a unit of Envestnet Asset Management, who took over as Merion’s president and chief executive in the spring. Merion has letters of intent from three RIAs to join Merion, according to Hughes, and is also negotiating a deal with a bank that has a national charter to exchange private banking and wealth management services. In addition, the company expects approval next month from FINRA to operate Mercap, a new broker-dealer.
“We’re looking for practices that have individual unique skill sets and advisors who want to preserve their legacy,” said Hughes, who was also president of Rittenhouse Financial Services and president of the separate accounts division for Nuveen Investments. “Our model is to merge practices into a holding company in exchange for cash and equity in the partnership.”
A public offering isn’t part of the plan, Hughes said. Instead, partners will be able to sell shares back to the partnership privately “presumably at a higher multiple” than they would have achieved had they remained independent.
Financial Planning, Retainers “Core” of Strategy
Merion hopes to attract advisors – and clients – by offering expertise in specialty areas such as charitable gift-gifting, legacy and estate planning, and, through its partnership with Ash Brokerage, risk management and insurance. But highlighting financial planning will be the “core” of Merion’s strategy, according to Hughes.
“Access to advice, expertise and resources is the value proposition, not ‘I can get you a better rate of return than anyone else,’” said Barnash, Merion’s new senior vice president of business development.
Services that advisors “can’t be best of breed at” will be outsourced to providers such as asset management specialist Envestnet, according to Barnash, a former national director of financial planning forand managing director for Lincoln Financial Advisors. “We’re not leading with product,” he emphasized, “Our offering is competency to bring advice strategy to financial planning and areas like executive benefits and 401k plans.”
Ultimately, advisors should be paid on a retainer model, Barnash said, with additional fees coming from additional projects for the client. He called the industry’s traditional fee structure of charging a percentage of assets under management a “big hoax,” describing it as nothing more than “the old transaction model disguised in a different form.”
Both Barnash and Hughes acknowledge that advisors aren’t likely to switch to a retainer model anytime soon, although they do believe it’s the wave of the future. “It will be an evolution and not a revolution,” Hughes said. “It won’t be implemented tomorrow, but that’s the way we see the industry moving.”
Industry observers disagree, although they do find merit it Merion’s emphasis on financial planning.
“Jim Barnash is a very high profile hire, and he knows as much about financial planning as anyone,” said industry consultant Tim Welsh, president of Nexus Strategy in Larkspur, Calif.
“Financial planning gives you better share of wallet, helps you better understand your clients’ goals and leads to less compliance issues. The downside is how do you make money doing it when it’s usually included in fees as a loss leader. It’s hard to get people to pay for planning separately when it’s not bundled in.”
As for charging a retainer, Welsh said Merion’s challenge will be, “How articulate will they be in explaining what you get for that retainer fee?”
Spears was also skeptical. “The retainer model doesn’t work,” he said. “You end up getting service creep, where the client keeps wanting more services for the same fee and your margins get squeezed.”
But spotlighting financial planning had real potential, Spears said. “It’s a skill set their competitors in that space don’t have,” he said, “ and it’s worked well for wealth management firms like Aspiriant, Baker Street and My CFO.”