LOOKING FOR MR. GOODBANK?: ILLINOIS BANK SEEKING TO FINANCE PURCHASES OF PLANNERS’ PRACTICES

A small Chicago-area bank has become the first financial institution to act on predictions of a wave of consolidations among independent financial advisers.

Cole Taylor Bank is launching a program to finance buyouts of adviser practices. The initiative is starting in the Chicago area, but easily could be applied nationwide, especially since the Wheeling, Ill., bank is talking with several large broker-dealers around the country about helping them finance acquisitions by their reps.

In addition, the bank, with 12 branches in Illinois and $2 billion in assets, is interested in helping bankroll acquisitive firms. Some, such as Reinhardt Werba Bowen Advisory Service of San Jose, Calif., a subsidiary of Winnipeg, Canada-based Assante Capital Management Inc., have been publicly on the prowl for financial planning firms.

The entrance for the first time of a financier focused on the investment adviser industry could kick-start the acquisitions that observers believe are only waiting to happen as more advisers begin thinking about retirement. The industry’s exponential growth, too, raises questions about whether the ranks soon will need thinning. For example, the number of advisers with individuals who have earned the certified financial planner designation has mushroomed 57% in the 1990s to nearly 32,000 at the end of last year.

Deals today typically are seller-financed, meaning the sellers must take their cash over time based on the profits of the business after it’s sold. Cole Taylor now will offer a way for sellers to get their money upfront.

formality pays

“The more that people are able to formalize the (acquisition) process, the easier it will be to do these deals,” says Mark Tibergien, a consultant with Moss-Adams LLP in Seattle who specializes in valuing adviser practices. “Seller financing is an inhibitor. In too many cases, the buyer is undercapitalized and the seller doesn’t have adequate resources to finance the deals.”

While Cole Taylor is talking with brokerages, the loans the bank will make to individual advisers wanting to buy out competitors are its bread and butter. The bank has established similar niche loan programs for other consolidating service industries, including dental practices, veterinarians and optometrists.

The dental program in particular has taken off. In five years, Cole Taylor has financed deals for more than 300 dentists, committing more than $35 million in loans.

“We think this (financial adviser) program will mirror those,” says Marcy Mossburg, a Cole Taylor vice president who’s spearheading the program. “There’s really a market here for someone who wants to address it.”

She declines to talk about the range of interest rates the bank might charge, as it still is ironing out details. But at a minimum sellers will be required to stay on for a year or two to ensure that clients don’t flee.

Buyers also will be responsible upfront for 25% or more of the purchase price, although in some instances the bank will allow a buyer to provide the seller a note, as long as it’s subordinate to the bank’s.

Cole Taylor has struck alliances with the Chicago law firm Much Schelist Freed Denenberg Ament PC to provide legal services and accounting firm Friedman Eisenstein Raemer and Schwartz LLP, a unit of H&R Block Inc., to help value adviser practices.

“The fact Cole Taylor is making any kind of commitment to this industry is a significant statement,” Mr. Tibergien says. “There just hasn’t been enough volume to pique anybody’s interest up to this point.”

The bank should be aided, he says, by the fact that adviser deals are starting to increase, albeit slowly, creating a track record that is clarifying what the practices are worth.

Such firms now are fetching prices at 4 to 9 times cash flow after taxes, salaries and overhead; 0.5% to 1.5% of assets under management; and/or 0.75 to 1.3 times gross revenues, he says. But Mr. Tibergien, who performed about 50 adviser valuations last year, cautions that each practice is different, and would-be buyers must account for factors such as the types of clients and the relative security of future income.

One problem is the state of advisers’ books. Many firms aren’t incorporated, and financial records can be incomplete or messy. Ms. Mossburg says the bank can figure a reasonable estimate of cash flow from the business, but may have to subtract expenses for “fluffy” items like country-club memberships and an estimate of overhead for advisers who work out of their homes.

Loans for businesses whose main asset is the stream of revenues they generate are inherently more risky, too. And a major downturn in the markets could drastically change the industry’s economics.

Still, Ms. Mossburg is optimistic. “It’s an industry ripe for this type of program. But I think it’s going to take a few years before it really blossoms.”