Led by former head of Prudential-Bache Securities, company has at least $15 million to spend on big RIAs and breakaways

April 5, 2010 — 4:09 AM UTC by Elizabeth MacBride

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Sanders Morris Harris Group, a quiet, publicly held company with one of the more unusual profiles in the advisory business, is preparing to go on a $10 –$15 million acquisition spree in the high-net-worth wealth management market.

The Houston, Texas-based company owns 14 wealth management firms. It’s now looking for firms with between $300 million and $3 billion in assets under management to add to that group. SMGH also owns 76% of Edelman Financial Services, which this year is opening 18 branch offices nationwide serving the mass affluent market.

Edelman’s expansion will generate much of the company’s growth, says George Ball, SMHG’s chairman, but SMGH also wants to expand in the high-net-worth market by acquiring fee-based and fee-only financial advisors.

“There’s an opportunity now,” says Ball. “Some advisors, having come through 07-08, are saying, ‘I don’t want to do that again.’”

He said the company may supplement the capital it has on-hand with bank borrowing, to bring the total up to $30 million.

Pure RIAs are the ideal targets, though, because they are rare, most of Houston-based SMHG’s acquisitions will end up being hybrids, he adds.

Serious player

That size war chest will make SMHG a serious player in a competitive market, said David Selig, CEO of San Francisco-based Advice Dynamics Partners.

“If SMHG’s ideal target is in the $300 million – $3 billion range, it places them in direct competition with most, if not all, of the roll-ups, as well as with many of the non-roll-up buy-side firms we represent at Advice Dynamics Partners,” he said. See: This generation of advisor aggregators puts the roll-up ghosts to bed, for now

Finding targets at the lower end of that range will be a matter of locating companies drawn to SMHG’s business model, he said.

“Competition for higher end targets, those in the $1 billion to $3 billion range, is extremely fierce. There are relatively few to choose from, and most generate the type of predictable cash flow desired by savvy, large scale buyers. This is evidenced by the 9-times to 12-times cash flow multiples buyers are willing to pay for these large firms,” Selig added.

No. 2 executive at E.F. Hutton

Though publicly held, with stock that closed Thursday at $6.21, near its high of $6.40, SMHG has kept a low-profile, as, lately, has Ball himself. A well-known Wall Streeter in the 1980s, he was the no. 2 executive at E.F. Hutton, which pleaded guilty to fraud for a check-kiting scheme that occurred during his tenure.

Ball left E.F. Hutton, before the scandal broke, to become head of Prudential-Bache Securities. Then, regulators charged that the company had defrauded hundreds of thousands of customers by misstating the risks involved in investment partnerships sold by brokers.

Ball has reinvented himself in his new job at Sanders Morris Harris Group, which now has 540 employees in 20 states and a market capitalization of $186 million. SMHG had $172.7 million in revenue in the fiscal year ending Dec. 31.

Though Ball built his career in wirehouses, he now sees the advisory business as the future. He says the difference between a wirehouse and an advisory business is that an advisory is “fewer people doing things in a more cohesive fashion with less bureaucracy.”

Regrettable compliance issues

Asked if his past hampers SMHG’s efforts to acquire companies, he said, “All major securities firms have had compliance issues. E.F. Hutton and Pru-Bache had theirs, regrettably. However, both had overall high standards and high-quality people, which those in the industry know.”

Edelman said Ball’s experience is helping Edelman develop a national presence. Read: Encouraged by early success in New York, Edelman Ramps up office openings

“George has substantial experience in operating and expanding huge national financial service firms (Hutton and Pru) – expertise I both lacked and wanted to tap into in our efforts to expand our firm nationally,” he said. “I did not know George personally prior to our transaction, but in the years since have gotten to know him extremely well, have found him to be among the most ethical, honest and forthright individuals – not to mention perhaps the brightest and most hard-working- I have ever met in this field, and I am proud to regard him as one of my closest friends.”

In addition to advisories, SMHG also has ownership stakes in 8 – 10 asset management companies, though advisors in SMHG are not obliged to invest client funds in them.

SMHG has about $43 million in cash and cash equivalents. Only about $15 million of that is needed for working capital, Ball said. Executives have mentally earmarked another $10-$15 million for acquisitions.

Upper echelons

“(That amount) will put us in the upper echelon of the operating companies making acquisitions,” Ball said.
The company is also considering borrowing money to bring its total war chest up to $20-$30 million. Some rollups in the market have that much money — and much more — to spend.

See: Weissbluth lands war chest for HighTower Advisors and See: VC firm bets millions on wealth managers amid market fears

Ball differentiated his firm from a rollup in that it is still an operating wealth management firm, and is not a company that exists solely to acquire other firms. Its primary custodian is Pershing.

SMHG may consider bringing aboard wirehouse brokers and their books of business, too, but Ball said their prices make them less desirable. “The bidding between and amongst the wirehouses has tended to drive the prices up,” he said.

Acquisition strategy marks a departure

The acquisition strategy marks a departure for SMHG, which has skewed toward organic growth rather than growth by acquisition. The companies that have become part of the group have tended to be attracted toward the way SMHG invests money, Ball said. That is through careful selection of investment vehicles that appeal to sophisticated investors.

The company has been opportunistic in the asset managers that it has acquired. For instance, Ball said, seven or eight years ago the company bought out a high-yield manager in Fort Worth, Texas.

“We thought that their investment methodology would be superior,” Ball said.

SMHG began as a private equity firm investing in comparatively small companies. Over time, “our customers asked us to help them with their conventional money,” Ball said. He had joined the company when it was a private equity firm.

Shed the skin

Six or seven years ago, he said, the firm made “a conscious decision to shed the skin of being a capital markets firm.”

In 2000, via an acquisition, the company went public. In 2005, the company invested in Edelman, which Ball said was “a very solid business. The investment precepts are sound ones.”

He said that Edelman’s primary investment modules are ETFs and the mutual funds of Dimensional Fund Advisors of Santa Monica, Calif.

SMHG bought the remainder of its 76% stake in Edelman, which accounts for about half the public company’s revenue and profits, in the middle of last year.



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