LPL and Fortigent may be cooking up a merger, sources say

Brooke’s Note: This deal was confirmed today by LPL. See: LPL makes big advance into the RIA business with Fortigent acquisition.

LPL Financial and Fortigent, LLC are exploring the possibility of a merger, according to a number of sources.

It’s an intriguing prospect. A strategic deal could give LPL, the Boston- and San Diego-based broker-dealer, a new foothold among some of the most elite RIAs in the industry. It could also give wealth management outsourcer Fortigent, based in Rockville, Md., the capital it needs to prevail in a competitive market that demands big staffing.

The services Fortigent offers are expensive to provide — including selection of managers and reporting software. Companies like Callan Associates Inc., for manager research, and Advent’s Black Diamond Performance Reporting, for reporting, specialize in these areas and have critical mass.

Neither LPL nor Fortigent would confirm or deny the reports that RIABiz is hearing from various high-level sources across the country who say they are hearing about a possible deal and asked to remain anonymous.

Michael Herley declined to comment on the matter on behalf of LPL.

“As a matter of policy we do not comment on rumors or speculation regarding our acquisition strategy.”

Gary Carrai, senior managing director, sales and consulting, declined to comment on behalf of Fortigent.

“There are rumors and speculation every day in the industry. We just don’t comment on strategic matters.”

Weekend meeting

Chip Roame: LPL has shown a
desire to push into channels beyond
IBD — including bank, clearing, RIA,
401k. Fortigent fits RIAs.

Fortigent may be seeking stronger financial support, sources say, despite a deal that resulted in the sale of a big chunk of the company to Affiliated Managers Group of Prides Crossing, Mass. last year.

A spokesman for AMG declined to comment for this article about whether his company is looking to sell it stake as part of a deal with LPL.

LPL is poised to become the fifth RIA custodian behind Schwab, Fidelity, TD Ameritrade and Pershing, and a deal with Fortigent would accelerate its bid to capture that prized position, according to Charles “Chip” Roame, managing principal of Tiburon (Calif.) Strategic Advisors. See: A peek inside the rising RIA custodians fighting to overtake the Big Four.

“LPL has shown a desire to push into channels beyond IBD — including bank, clearing, RIA, 401k. Fortigent fits RIAs.”

In its third year of existence, LPL’s RIA custodial arm has $20.2 billion in assets under custody, up 75% from a year ago when the firm had $11.6 billion. LPL has 142 RIA firms, up 35% from a year ago, says Derek Bruton, managing director and national sales manager, Independent Advisor Services. The company does not break out what percentage of the $20.2 billion of assets are commission and fee-based.

(Too) highly customized?

Fortigent has been able to show tremendous growth both in terms of its quality and quantity of clientele — raking in one big RIA after another. See: How Fortigent got $50 billion on its platform by treating an RIA pain-point. It now has about 90 clients, including a slice of the nation’s most respected RIAs, advisors and private banks. That’s up from 30 in 2006 and 50 in 2008. It has about $50 billion of assets.

Last week we reported on its most recent client win — a breakaway that services successful Silicon Valley entrepreneurs. See: West Coast breakaway drops UBS in favor of Sanctuary/Fortigent outsourcing.

Yet Fortigent’s growth may have come at a steep cost, as providing a high level of service at relatively low fees makes profitability hard to attain, according to an industry observer familiar with Fortigent but who had not heard about the possibility of a deal.

“The company’s business model of services for a flat lower fee rather than assets has been great for the client but has hurt them,” the source says, adding that the services are customized to the point of being difficult to outsource.

“[Fortigent’s] world of pulling together large disparate pieces of information is not scalable and India has not proven the best at helping.”

Gary Carrai: It is this pricing
structure that has helped Fortigent maintain
profitability, attract exceptional wealth management firms,
and contribute to our high growth
rates.

Carrai, however, stresses that Fortigent’s model is not strictly flat-fee and that its admixture of fixed- and non-fixed fees aids in his company’s success and profitability.

“We have both a fixed and variable component to our pricing structure. The fixed fee covers investment consulting research services and proposal generation. The variable fee covers data aggregation, reporting and unified managed accounts. Both the fixed and variable components are priced based on complexity, including any customization. It is this pricing structure that has helped Fortigent maintain profitability, attract exceptional wealth management firms, and contribute to our high growth rates,” Carri says.

The match game

Another sign that Roame and other sources say augurs well for a deal is that LPL is flush with cash. Yet other sources say that AMG’s coffers are also full and it would therefore not allow Fortigent to be sold at distressed price. LPL, in other words, is not likely to get Fortigent at a bargain-basement price, whatever the firm’s financial challenges.

Another factor that could weigh against a deal, another says, is that LPL’s typical advisors are very small IBD reps with about $15 million of assets under advisement — firms that would not be natural consumers of Fortigent’s high-end services.

The average advisor on LPL’s high-end hybrid RIA hybrid platform, on the other hand, has about $140 billion of assets. That includes Carson Wealth Management, an RIA that manages about $3 billion of assets from Omaha, Neb. See: Ron Carson quickly sees benefits of converting his practice to an RIA. LPL has 142 of these hybrid RIA firms, up 35% from last year.