Mergers of advisers and benefit firms seen as a natural fit
Mergers between employee benefit and financial advisory firms may become common as they set their combined sights on baby boomers’ retirement assets, according to industry observers.
NEW YORK — Mergers between employee benefit and financial advisory firms may become common as they set their combined sights on baby boomers’ retirement assets, according to industry observers.
Such mergers make sense because one of the biggest headaches with employee retirement plans is rolling over the assets, said Sunny Patpatia, president of Patpatia & Associates Inc., a Berkeley, Calif., financial services consulting firm.
“The benefit firms are plan facilitators — they are usually not investment people. They need the advisers, who are investment people,” he said.
“The linkage between advisers and benefit firms is a natural,” said Kevin Ahern, a director and sector specialist in the life insurance
division of Standard & Poor’s in New York. “Everyone is trying to position themselves for the rollover market, but many of the firms’ skill sets are too narrow.”
There appear to be no obvious obstacles to mergers of benefit firms and advisers.
“I’m not aware of any regulatory or legal challenges in combining those [benefit administration and financial advice] functions,” said securities lawyer David Bissinger, a partner with Siegmyer Oshman & Bissinger LLP in Houston.
One such merger already has taken place. New York-based Lenox Advisors Inc. this month merged with Murphy Todd Group, a Chicago-based employee benefit and insurance company, hoping that anticipated synergies would allow them to capture and retain more investment business, especially from the retiring baby boomers.
“This is the front end of a trend,” said Jim McClure, a Lenox partner. “I am not aware of any other mergers of this type.”
Synergies are expected
“Merging makes sense for firms that want to grow in servicing the baby boomer marketplace,” said Pat Murphy, a partner with Murphy Todd. “I used to have to farm out work involving my clients’ more complex planning needs, but now I won’t have to do that.”
For instance, one of Mr. Murphy’s retirement plan clients recently received a $6 million windfall. “We salivated at the prospect of serving high-net-worth clients who enjoyed working with us on the benefits side — but didn’t have the expertise,” he said. Using Lenox’s client service model will help retain and expand that type of business, Mr. Murphy explained.
Lenox is part of National Financial Partners Corp., a publicly traded New York company that owns about 175 firms in the financial and insurance sectors.
“We encourage our firms to make subacquisitions,” said Elliot Holtz, executive vice president for marketing and firm operations for NFP. “It is a way for them to expand beyond traditional organic growth,” he said.
There already is cross-selling going on among NFP’s owned advisory and insurance firms, Mr. Holtz added, although there are no plans to “merge” them.
“The benefit firms are good at getting the retirement business, but when the employees retire, they are not holding on to those assets,” he said.
Before the merger, Murphy Todd engaged, to a limited extent, in fee-based personal financial planning, including mutual funds, asset management and estate analysis, but referred out work it did not have the resources to handle in-house, Mr. Murphy added. The firm’s core business is 401(k) plans and other benefits.
“Serving the retiring boomers requires several core competencies, including financial planning, insurance brokerage and corporate benefits,” Mr. McClure said. It is extremely difficult for one advisory or one benefits firm to have best-in-class knowledge in all the required areas, he added.
“There will be lots of cross-
selling opportunities for which the expertise formerly was not there,” Mr. Murphy said.
“The two firms serve very similar markets as far as client income, net worth and lifestyle are concerned,” Mr. McClure said. Also, both firms are comfortable with obtaining revenue from fees and commissions.
One “reservation” the lawyer, Mr. Bissinger, has is that advisers may tend to promote “more-aggressive and higher-compensated” products than a benefit and insurance firm, which might tend to favor “more-conservative fixed-income investments.”
Also, client approvals may be necessary if the benefit firm is registered.
“If the employee-benefit firm is registered as an investment adviser, the clients would have to give approval — as required by the Investment Advisers Act — to continue their contracts,” said Jon Rand, a partner in the financial services group of Philadelphia-based law firm Dechert LLP.
“Otherwise, no regulatory approvals would be required,” he said.
In the Lenox-Murphy Todd merger, no regulatory approvals were needed, keeping time and other costs to a minimum. Less than $10,000 was spent in new licenses and other legal expenses, including setting up a new limited-liability company to own the combined entity, Mr. McClure said.
Both merger partners distribute the financial products of MassMutual Financial Group of Springfield, Mass., and that company “will still play an important role” in the combined entity, Mr. Murphy said. Other companies’ investment and insurance products also will be offered, he added.
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