Just recently, Sequoia Financial Group LLC of Cleveland acquired $91 million in client assets from Florida based Hammerman & Strickland LLC. By acquiring the firm, Sequoia has increased its assets under advisement to more than $1.2 billion.
On the West Coast, First Allied Holdings Inc., which has more than 1,000 advisors, recently announced plans to acquire The Legend Group of Palm Beach Gardens, Florida. Legend provides a variety of investment services and retirement planning.
Also generating attention were recent acquisitions by First Republic Bank and Evercore Wealth Management. First Republic recently said it has acquired Los Angeles–based Luminous Capital, which manages $5.5 billion in assets, while Evercore, which is also based in California, plans to acquire Mt. Eden Investment Advisors. The acquisition target has $645 million in client assets.
At the same time, noted advisor Edelman Financial Services LLC says it is shopping for an advisor with at least $1 billion in assets under management. For Edelman, the acquisition would be the start of its strategy to aggregate smaller advisory firms.
Mergers and acquisitions among investment advisors, of course, aren’t uncommon. Firms typically use acquisitions to generate economy of scale savings. The goal is to spread the costs of back office legal compliance, back office services, marketing and other functions among a larger pool of clients, thereby helping to keep fees low while maintaining profits.
Acquisitions can also help firms expand into geographical regions and broaden the services that they offer. For aging financial advisors, selling their firms is a popular succession strategy. Indeed, the sale of Hammerman & Strickland was driven, in part, by the desire of the firm’s aging owner to exit the business. Since many advisors are older than 50, there is a strong pipeline of firms that are up for grabs.
Despite a fairly slow third-quarter for acquisitions, deal activity is exceeding the pace of 2011, according to Schwab Advisor Services, a unit of Charles Schwab. As of the end of the third quarter, year-to-date assets under management for M&A totaled $42.3 billion, nearly eclipsing the $43.9 billion for all of last year.
According to Schwab, uncertainty in capital markets and the presidential election have caused many smaller investment advisors to delay making acquisitions, unlike larger national firms, which have continued to shop for attractive advisory companies.
The coming months, meanwhile, could see a big spike in acquisition activity as owners of advisory firms seek to complete deals prior to the Fiscal Cliff of 2012. The Fiscal Cliff is likely to result in substantial cuts in government spending and higher tax rates, potentially including capital gains. Next year, for example, the Bush era tax cuts, which lowered the long-term capital gains tax rate from 20% to 15%, are scheduled to expire. So, owners that expect to generate capital gains when selling their firms have a strong incentive to complete deals prior to 2012, which could heat up the merger and acquisition market.
