Mark Hurley chips in the cash and Liz Nesvold sells Kobren for a second time

March 21, 2011 — 2:53 PM UTC by Brooke Southall


E*TRADE’s attempt to become part of the RIA business by rolling up advisory practices is over.

The New York-based discount brokerage giant, which at one point owned four big practices with more than $3 billion of combined assets, sold the last one — Kobren Insight Management — for an undisclosed sum to a local RIA on Friday.

Adviser Investment Management Inc., which manages $1.2 billion of assets from Newton, Mass., purchased Kobren, which manages $1 billion from Wellesley Hills, Mass. The deal was originally signed on Dec. 31.

Leveraged buy-out

The deal was a leveraged buy-out in which 14 partners of Adviser Investment Management and six partners of Kobren became part-owners of Adviser Investment Management. AIM manages $1 billion; the new firm will manage more than $2.2 billion. Both companies concentrate on researching intensively to choose top separate account managers.

The sale completes a remarkable round trip for E*TRADE. When it embarked on its buying spree in 2006, it became the only one of the discount brokers to choose a roll-up strategy rather than going the route of creating a custody platform for RIAs. See: This generation of advisor aggregators puts the roll-up ghosts to bed, for now

Virtually all of the major discount brokers starting with Charles Schwab & Co., Fidelity Investment and the former TD Waterhouse went the asset custody route. Latecomers were Ameritrade and Scottrade, but both became fully ensconced in RIA custody.

Scottrade founded its RIA custody unit in 2005 and now has more than 800 RIAs who custody there. Ameritrade announced its acquisition of TD Waterhouse and its large RIA unit in 2005 after establishing a small custody unit in the previous few years.

See: Where TD Ameritrade has come since its 2006 merger and where it is headed in 2010

For these upstarts to the wirehouses, it was an indirect but effective way for them to gather the assets of high net worth individuals.

Mitch Caplan legacy

E*TRADE made the decision to go the roll-up route under its former CEO, Mitchell Caplan, an aggressive businessman who was replaced by Don Layton, a J.P. Morgan veteran, after revelations about the poor credit quality of the company’s $15.7 billion mortgage portfolio. Steven Freiberg came aboard last March.

The company has yet to turn profitable since Caplan left, but Freiberg says that the company will do so this year. In 2010, it lost $28 million, a big improvement from its $1.3 billion loss in 2009.

Freiberg has a simple reason for moving out of the RIA business as he seeks to stabilize E*TRADE, says Susan Hickey, a spokeswoman.

“We’re focusing on our core brokerage business,” she says .

The company sold Retirement Advisors of America in Dallas in 2008 for $80 million to
PHHInvestments Ltd. Howard Capital Management of Los Angeles was sold in a managed buyout.

Lockwood replaces Kobren for HNW investors

E*Trade has not given up on the idea of serving high net worth individuals. In January, it announced a unified managed account program for customers who invest $250,000 or more with the company. The program is outsourced to Lockwood, the separate accounts provider owned by BNY Mellon.

E*TRADE shares currently at about $15 a share, down from a high of $252.10 on June 8, 2007 when reverse splits of the stock are calculated in.

E*TRADE’s spin-off of its final RIA is a tremendous gain for Adviser Investment Management, according to its president, Dan Silver, who says it’s an opportunity to make a major leap forward in the business.

“The goal is to form one of the top firms in the country,” he says.

The new firm has 55 employees including 19 from Kobren and 35 from AIM. Today, the 19 Kobren employees will take new desks at the Newton headquarters.

The decision to buy Kobren was an easy one, according to Dan Silver.

Role model

“They were our big brother in the Boston market – the more mature firm that we always admired.”

Kobren was founded in 1990 and AIM in 1994. AIM is known outside its immediate circle because it has Jim Lowell as its chief investment officer. He was the publisher of Fidelity Investor, a well-respected newsletter that watched the company carefully. Dan Wiener, CEO of AIM, originally ran a newsletter for Vanguard investors before starting the RIA.

Both firms keep the vast majority of their assets with Fidelity Institutional Wealth Services. The firms use two different portfolio accounting systems and Silver declined to say which ones. He says that the two firms will eventually choose to consolidate onto one system and that the decision has yet to be made.

The two firms use the same investing approach of intensively researching the best investment managers and then choosing them.

Elizabeth Nesvold, investment banker of New York-based Silver Lane and Mark P. Hurley of Fiduciary Network LLC of Dallas, Texas, get credit for helping the deal happen. Nesvold also brokered the deal that sent Kobren to E*TRADE in the first place.

The deal was the 12th one completed by Fiduciary Network, the firm founded by Hurley that finances management buyouts. In this case 20 managers – 14 from AIM and six from Kobren – participated in the buyout.

Fiduciary Network participated in the deal in three ways: 1.) by contributing permanent capital to AIM 2.) by providing acquisition capital for the deal and 3.) by lending money to the managers to participate in the leveraged buyout.

Pain in the brain

As the lending levels suggest, the deal terms were not disclosed and it was highly complex, Hurley says. “My brain hurts,” he added. Fiduciary Network, which has a 20% non-voting stake in the deal, got 100% of the capital from New York-based Emigrant Savings Bank, which is solely owned by Howard Milstein and his family.

The Adviser Investments-Kobren deal is likely to succeed because the two firms are already intimately familiar with each other, have similar cultures – and share an even more important commonality, according to Hurley, who is considered a leading voice on the subject.

“Unless you’re in the same geographic market, you don’t generate cost savings,” he says. “This is a great acquisition for these guys.”

Silver says Fiduciary Network offered a “reasonable” cost of capital, and he and his partners like the fact that – unlike conventional private equity players – Fiduciary Network does not seek to see a down-the-road liquidity event.

“They’re not looking for an exit and it’s like they’re creating a bond of investment firms” that pays a healthy annuity, Silver says.

Fortuitous lunch

Silver says he became aware of the Kobren deal when Hurley stopped by his Newton offices on his way down from Maine to share lunch as part of a road show associated with his the white paper he published last summer. See: What to make of Mark Hurley’s latest prophesy that most RIA firms will go out with a whimper and Bob Veres adds his bottom line to valuation debate started by Mark Hurley.

He adds that he is pleased that Hurley was doing his white paper “road show” at just the right time to bring word of Kobren’s availability to him in person.

“It was a worthwhile lunch as it turned out.”

Mentioned in this article:

Silver Lane Advisors
Mergers and Acquisition Firm
Top Executive: Elizabeth Nesvold

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