As $160-billion CAPTRUST makes a snack of $10-billion Pensionmark, Fielding Miller accelerates his roll-up plans with a liberal structure

Brooke’s Note: For RIA roll-ups, it looks like rolling a boulder uphill. Scale doesn’t always confer benefits at the same pace as it eradicates them for advisors managing the personal wealth of high-net-worth individuals. With 401(k)s, now a green pasture for RIAs in light of DOL changes in the works, the roll-up game may work much differently. Scale matters because every penny of profit makes a difference in this slim-margin business. But how do you combine these firms rapidly enough to keep pace with the mega-401(k) giants like Empower or Fidelity? This article shows that the biggest 401(k) roll-up out there is coming at the challenge with a flexible — and aggressive — approach.

Fielding Miller faced a brutal choice between power and control as he pondered how to add the next $160 billion of assets under advisory to his 401(k)-specialized $160-billion RIA. The chief executive of Raleigh, N.C.-based CAPTRUST Financial Advisors made his firm a giant in its class by meticulously managing its systems and culture. Miller, however, recognized many deals didn’t comport with his preference for total control.

Such was the case with Pensionmark Retirement Group.

Now Miller is wresting the $10-billion AUA RIA in Santa Barbara, Calif. from the control of super-OSJ Independent Financial Partners, which manages $50 billion of AUM from Tampa, Fla. But the deal only got done because Pensionmark gets to keep a 51% stake — and that 2% advantage for Pensionmark makes a world of difference, according to industry observers.

“This is pretty unique,” says Bing Waldert, director at Boston-based Cerulli Associates Inc. “CAPTRUST always wanted advisors to succumb to the CAPTRUST way and use their centralized services kind of like United Capital Financial Advisers. Now, it strikes me that this is like Raymond James or Ameriprise where you’ve got two choices: you can be an employee with CAPTRUST or an independent under Pensionmark.” See: CAPTRUST wakes up the 401(k) industry by buying $1-billion advisor/recordkeeper that adds the 'magic’ to its arsenal.

Independent streak

Fielding Miller: We feel we can
bring more to the table than
the other competitive alternatives that are
out there.

Maintaining majority ownership and keeping Pensionmark as an autonomous brand was an attempt at avoiding “weirdness,” according to Troy Hammond, president and chief executive of Pensionmark.

“The main reason it was important to me is because I knew it would be important to our advisors. Our advisors are independent… If we sold our enterprise to CAPTRUST, I think it would have felt weird to our advisors.”

Hammond, 45, has been with Pensionmark since 1990 — all his working life. The firm was founded in 1988.

Pensionmark oversees 1,500 retirement plans. The company works with 55 advisors, who mostly manage retirement assets, in 37 locations and plans to bring aboard an additional seven advisors in the next two months. Retirement advisors can take their pick among a few dozen recordkeepers. See: In red-hot 403(b) market, TIAA-CREF hires hundreds of advisors after RIAs, and Fidelity, pose new threats.

CAPTRUST grew rapidly in the last year, adding about $30 billion to its books, bringing its assets under advisory to $160 billion.

Freedom of choice

Until the deal is finalized next month, Pensionmark will continue to use San Diego- and Boston-based LPL Financial as its primary broker-dealer and an advisor under the LPL-affiliated office of supervisory jurisdiction, Tampa, Fla.-based Independent Financial Partners.

Starting May 4, Pensionmark will create its own OSJ, the first of its kind at CAPTRUST. That means it will use CAPTRUST as its broker-dealer and will custody RIA assets with Schwab Advisor Services, Fidelity Institutional Wealth Services and Pershing Advisor Solutions. The newly formed Pensionmark will handle all back-office operations for advisors.

Terms of the deal were not disclosed.

CAPTRUST’s acquisition style traditionally involved swallowing firms whole under the CAPTRUST brand. Advisors who wanted to affiliate with CAPTRUST needed to become employees at the firm. With this alliance with Pensionmark, advisors who join the new platform may use Pensionmark’s brand or that of their own firm and may use Pensionmark’s back-office services — CAPTRUST is investing money to build them out — while maintaining their independence through Pensionmark.

Hail and farewell

In joining CAPTRUST, Pensionmark is bidding adieu to Independent Financial Partners with which it has been affiliated with for the last four years. IFP’s founder, William Hamm Jr., notes the unique quality of the deal Hammond inked with CAPTRUST.

“It’s a one-of-a-kind deal. That’s not CAPTRUST’s M.O. at all,” Hamm says.

Hammond says Hamm’s operations are good but that he needed to reach higher. “We just needed to take it to the next level and wanted some tools and infrastructure that are really cutting edge.”

But “cutting edge” may come at a price for the Pensionmark clients now under CAPTRUST, Hamm counters.

“Their model is different than ours. The expenses on the platform are a little higher. I wish them well. Troy and his staff have been a great partner and I understand their reasons for leaving which are not IFP-related and we’ll continue to stay in touch. You never burn bridges in this business because you never know when you’ll cross them again.” See: Three MSSB brokers gravitate to a $4.5 billion LPL hybrid with a hefty RIA platform — and a sub-channel appears to be nearing critical mass.

New firm onboard

William Hamm Jr.: It’s a one-of-a-kind
deal. That’s not CAPTRUST’s M.O. at
all.

Hamm’s firm works with about 510 advisors and has close to $50 billion in assets under advisory counting $10 billion from Pensionmark. But by ramping up recruiting and hiring another recruiter, he says IFP has replaced that $10 billion.

“The good news is that we’ve already replaced their production this year so economically it will have minimal impact,” says Hamm. “Change always brings opportunity and we will take advantage of each one that comes along.”

Hammond says that that one of the reasons that Miller agreed to the deal is that he’s hoping it serves as a readily replicable blueprint for getting other advisors to bring their books of business to CAPTRUST down the road.

Different models

Hammond declined to disclose platform fees at CAPTRUST, except to say they should be similar to LPL’s.

“At LPL if you used any custodian other than LPL, they charge you 4%. But here, there won’t be those fees. I think there may be a reduction in cost. The trading costs at LPL are higher. Schwab has lower trading costs. You’ll see significantly lower trading costs.”

IFP and Pensionmark operate with different models, Hammond says.

“We’re not just aggregating advisors and providing outsourced infrastructure. We’re providing outsourced infrastructure. We do investment reporting for advisors’ clients,” he says. “We have a call center where participants can get financial wellness. LPL doesn’t have that kind of service either. They’ve got a tool set. But we’re doing the work. It’s not right or wrong, but our model is just different. We’re a more fully ingrained infrastructure model.” See: How LPL lured advisors from Raymond James, UBS and Ameriprise to its hybrid RIA platform.

Of Pensionmark’s $10 billion in assets, about $9.5 billion derive from retirement assets. But the firm makes 30% of its revenues off its half-billion dollars in wealth management assets. Margins are much more compressed for the retirement assets than in wealth management assets. See: Schwab shoos $25 billion of client assets out the door as it calls the bluff of employers with lopsided 401(k) contracts.

Niche power

Bing Waldert: I don’t see anything
like this put together this way.

Miller says the new alliance offers the built-in expertise in the retirement arena that Pensionmark has to offer.

“Pensionmark has been doing this for years and there’s proposal generation and services that are provided as part of this. Serious specialists that primarily work in the 401(k) market need a back-office that can help them run their business.” See: The great 401(k)-or-not debate: RIABiz webinar lays out the perils and rewards for RIAs thinking of wading into the fast-moving 401(k) stream.

He’s counting on that edge to help Pensionmark win advisors away from the competition.

“We’re a niche player and we understand retirement and we understand retirement advisors and we feel we can bring more to the table than the other competitive alternatives that are out there,” Miller says.

Certainly, IFP has enhanced LPL Financial’s retirement expertise in the past few years.

“LPL has spent years focused on supporting independent advisors in this market, growing it to 1,800 advisors servicing over 41,000 plans,” according to a statement issued by LPL.

Good 401(k) fit

Wealth management aggregators HighTower, based in New York, and Mariner Holdings of Leawood, Kan., brought over major retirement experts at the end of 2014 as a way to dip their toes into the retirement arena. See: HighTower adds two battle-hardened T. Rowe generals to the 401(k) field. See: How Mariner Holdings is angling to become a $3-billion 401(k) company overnight by co-opting a local SageView office.

But Waldert maintains that this deal is something different.

“I don’t see anything like this put together this way. You see some wealth management broker-dealers who are struggling to find out how to handle their 401(k) business and where it should fit in for them. You see emergence of these boutiques for defined contribution consultants to address these and coming from unique places.”

Miller says this new partnership will resonate with retirement-focused RIAs who may also have brokerage business and are currently relying on a broker-dealer such as LPL. While the existing broker-dealers are solid, Miller says none of them specialize in 401(k) plans like his business does.

“The specialized retirement space is wide open,” he says. “There’s a lot of advisors looking for a new home. We thought this is a new opportunity to build a premier model. We thought Pensionmark had the talent to take advantage of this.”