Leawood, Kan., a quiet suburb of Kansas City, is not exactly the kind of place you might imagine would be home to the headquarters of a $50 billion independent registered investment advisory firm with offices spread around the country. And right now, it's not. But Marty Bicknell, chief executive of Mariner Wealth Advisors, wants it to be. He's aiming for mid-decade.
Bicknell launched Mariner after a 15-year career at A.G. Edwards, opening a single office with eight employees in 2006. A few years later, he opened another office in Pittsburg, Kan. Then in January, Mariner bought CBIZ Wealth Management, the advisory arm of the accounting and professional services firm CBIZ. (He declined to disclose the terms of the deal.) Suddenly, Mariner has nine offices in Kansas, California, New York, Pennsylvania, Maryland, Colorado and Missouri and close to $9 billion in assets under management.
Bicknell is now setting his sights on “Kansas City-like communities” in the Midwest, including Tulsa, Omaha and Des Moines, as well as bigger markets like Chicago. “Being a national firm is one of our goals,” he says. “We think it's definitely doable. The CBIZ deal showed that there are a number of acquisition opportunities out there that are the right fit for us from a cultural standpoint.”
Marty Bicknell is not alone. The average RIA firm still has just one office and three advisors, according to the latest report on the wealth management industry from Boston-based Aite Group, but a cluster of RIA firms is expanding rapidly with an eye to achieving a national footprint. As the appeal of the independent RIA industry has grown in the past half decade for both financial advisors and clients, so have many of the firms that practice this particular breed of fee-based financial advice. It represents a new stage in the maturity of the RIA business. RIAs have been grabbing slivers of market share from their giant Wall Street rivals — wirehouses like Merrill Lynch and Morgan Stanley Smith Barney. According to the same Aite report, wirehouses lost nearly one percentage point of market share in 2009 to end the year at 38 percent, while RIA market share rose 1.5 percentage points to 12 percent.
Of course, there are challenges to navigate in any expansion — those who go the acquisition route say it's essential to find the right cultural fit, prevent in-fighting among newly-combined firms, cut out redundancies and establish consistency of service and brand delivery. But the benefits of national reach are real — economies of scale in an era of escalating compliance costs, better brand awareness among potential clients and an ability to cater to the increasingly mobile rich.
Indeed, a wide range of firms are set on establishing a national presence. They include multi-family offices such as GenSpring Family Offices and Silver Bridge Advisors; holistic wealth mangers like Aspiriant; HighTower Advisors, a hybrid broker-dealer/RIA model for high net worth clients; traditional RIAs like Mariner Wealth Advisors and Edelman Financial Services; and the high-profile aggregators or so-called “roll-up” firms like Focus Financial Partners and United Capital Financial Partners. (See table on page 28.)
Bigger Is Better
United Capital is perhaps the RIA firm that is closest to achieving national scale. It now has 30 RIA firms in 14 states under its umbrella and nearly $5 billion in assets under management, says founder and chief executive Joe Duran. Last year, United picked up six new RIAs. And in January, it grabbed headlines with its blockbuster acquisition of Bethesda, Md.-based Zirkin-Cutler Investments, which has more than $1.6 billion in AUM, from M&T Bank Corp. for an undisclosed sum.
RIAs who sign on with United for cash and an equity stake become part of a “soup-to-nuts vertically integrated practice” with all administrative functions, investment operations, research, technology needs, regulatory compliance and marketing taken care of, according to Duran. The individual firms acquired take the United brand name, but are managed by the local partners.
This year, United hopes to add six “flagship” offices in major markets in Pennsylvania, Arizona, the Southeast and the Northwest, Duran says. By 2013, he envisions having offices in the nation's top 25 major metropolitan areas under the United brand name. “We absolutely want to be a national firm,” says Duran.
Duran says a national presence will allow United to create a uniform experience for the firm's clients, no matter where they are, and to take advantage of volume discounts from suppliers. Uniform service around the country, Duran maintains, means happier clients who will be more likely to recommend United to friends and family, helping the firm grow. He cites the Four Seasons hotel chain as a model. “People know the brand well and will even spend a little extra money because they know what they're going to get, regardless of the location.”
The scale of a national chain also means being able to “negotiate pricing and terms that are simply not available to firms that are local boutiques,” he adds. Scale allows the firm to negotiate with funds and money managers, to request specially tailored products, and to save on outsourcing functions such as accounting, technology and investment operations. It can pass along these savings to its local offices. Duran estimates that one local firm he is currently negotiating with will be able to slash internal operational service costs by two- thirds if it joins United.
Indeed, many outsource providers who provide investment advisory services, such as Envestnet, Fortigent and SEI, require asset minimums, as do many platforms for actively managed funds, separately managed accounts and alternative investments, says Alois Pirker, research director and senior analyst for Boston-based Aite Group. “Investment products are where scale really comes into play. Costs go down and firms get breaks as they add more assets on a platform.”
Greater scale and a national brand also appeal to quality talent, says Ric Edelman, chairman and chief executive of Fairfax, Va.-based Edelman Financial Services, which currently has 21 offices in eight states and over $6 billion in AUM. “It's a tremendous advantage from a career perspective, for employees and not just advisors,” Edelman says. “You're able to recruit a higher caliber of employee because they see they will have career opportunities they ordinarily wouldn't have in other firms.”
For example, Edelman says financial advisors often contact his firm when they hear Edelman is opening a new office because they want to spend less time doing administrative tasks and more time with clients. Advisors also like the idea of being able to relocate in different parts of the country, he adds.
Some say economies of scale really come into play once you reach $1 billion in assets under management. “The bigger you get, the better you get at managing leverage and scale,” says Gary Carrai, senior managing director for Fortigent, the Rockville, Md.-based wealth management platform provider. “After you reach a certain level of assets, say $1 billion, the next incremental billion should be more profitable.”
This is especially true at a time when compliance costs are rapidly escalating. Nearly 8 percent of RIA revenue is typically spent on compliance, according to estimates from industry consultant Tim Welsh, president of Nexus Strategy in Larkspur, Calif. And he projects that percentage “may well double over the next three years, based on provisions in the Dodd-Frank Act.” That means not only that big firms want to continue expanding, but that many smaller firms are more receptive to acquisition offers because of the onerous increase, Welsh says.
“That is a real concern for advisors and a factor without a doubt in firms deciding to be part of a much larger enterprise,” Welsh says. “If you can allocate the cost over a larger revenue base in percentage terms, there's going to be less overhead. It's the only way out.”
A Mobile Generation
Having offices all over the country is also increasingly important for firms that want to cater to mobile clients and baby boomers headed into retirement with second homes in different parts of the country, say advisors interviewed for this story.
“A national footprint is beneficial because high-net-worth advisors now have a much more dispersed client base who are traveling for business and to second-home locations,” says Chicago-based HighTower Chief Executive Elliot Weissbluth. “It's good to have the infrastructure to be where they are.” For example, approximately half of New York-based managing director Andy Morse's 120 client families have homes outside the New York area, mostly in Florida or the Sunbelt, he says.
“On average I get a call every two weeks from a client over age 55 who is considering moving to a state where income and estate taxes are lower,” Morse says. “We need to be where they are because wealth management is as personal as a process can get. It's like medicine. It requires personal attention. It's not something that can be done by e-mail.”
For very well-branded firms like Edelman's, it's a matter of popular demand.
“We're going national largely in response to demand,” explains Edelman, who hosts a nationally syndicated radio show that is heard in 37 markets around the country. “We're getting calls from people all over the country who work with us over the phone and are asking us to open an office near them.” For example the firm received hundreds of calls from his radio listeners in the Detroit area asking Edelman to open an office, he says, and in January the firm did just that, opening a new office in Troy, Mich.
Edelman says he envisions his firm eventually having offices in the nation's 50 largest markets as well as smaller ones to fill in geographical holes. This year he plans to be in three more states, adding offices in San Francisco, Columbus, Ohio and Phoenix.
For all the allure of achieving national status, it is also fraught with challenges.
“If it were easy, somebody would have done it,” says analyst Wallace Blankenbaker, senior director for the VIP Forum, who covers wealth management for the Arlington, Va.-based research firm.
Firms undergoing rapid and far-flung growth run the danger of spreading themselves too thin, bringing on advisors who aren't a good cultural fit or losing the unique characteristics that made them a local success in the first place.
“RIAs that become national firms run the risk of eroding their value proposition,” Blankenbaker argues. “As you get bigger and try to make things scalable and uniform, it takes away from a local firm's entrepreneurial ability. They may want to operate very differently, and losing the local flavor seems contradictory to the value proposition.”
Losing his firm's local identity was, in fact, a major concern for Lane Carrick, founder of Memphis-based Sovereign Wealth Management, who joined United Capital in November, and immediately took on the United brand name.
After the deal was finalized, Sovereign called all its clients, Carrick says, and explained its benefits. “We reaffirmed our value proposition to them,” he says, “and told them we acquired additional research, technology and financial planning tools and would be able to spend more time taking care of them.”
Firms expanding nationally also need to make sure they are able to integrate and maintain consistency at every level of service and offering. Examples include expected turn-around times of client activities, levels of client communications and the number of meetings with clients based on their complexity and needs, according to “Creating Growth: The Rewards and Challenges of the Multi-Location Model,” a recently released white paper by FA Insight and Pershing Advisor Solutions.
Integration can indeed be challenging, Carrick says. “Plain and simple, when you take the process you have used on your platform and move them to a remote platform, there is an adjustment period. For example, we're now on dual systems. But once you get through it, there's a pot of gold at the end of the rainbow.”
Despite the risks, half of the country's top 50 wealth managers now have offices in multiple locations, according to the FA Insight report. And those seeking a national presence are undeterred. “It's not like there's a monster in this space,” says United's Duran. “The playing field is wide open.”