Cambridge’s new RIA sets floor to make a deal

'The advisor wants to get out of the business at 65 or 70 but clients will live to be around till 90,' says one banker.

Cambridge Investment Inc.’s new registered investment advisor business, BridgePort, is taking its first steps into the red-hot buyers’ market of wealth management firms by offering a minimum investment of 20% of the seller’s firm, according to industry sources familiar with Cambridge’s strategy.

Introduced at the start of the year, BridgePort Financial Solutions is focusing on strategic acquisitions and is looking to buy a minority, majority, or full ownership stake in their business, according to an announcement by the company. Firms can also adopt the BridgePort brand or keep their own.

“Retention of the financial advisors is job number one for Cambridge, and setting that minimum of 20% helps them do that,” said one industry executive, who asked to speak privately with InvestmentNews.

A spokesperson for Cambridge Investment Research did not return a call Monday morning to comment.

With 3,800 financial advisors, Cambridge Investment Research is one of the largest independent broker-dealers in the industry, with one RIA, Cambridge Investment Research Advisors, working with $87.4 billion in client assets. Launched by industry veteran Eric Schwartz in the 1980s, Cambridge is well known as a firm that uses an open platform of products and custody services to fit financial advisors’ businesses.

But Cambridge, like its competitors LPL Financial and Commonwealth Financial Network, for several years has been trying to remodel as an RIA; advisory firms, which charge clients quarterly fees, are widely considered more valuable right now in the marketplace than broker-dealers, which charge commissions for transactions and have a wide variety of conflicts to consider when selling products to clients.

For example, Cambridge Investment Research Advisors in March recently updated its Form ADV, disclosing that the Cambridge RIA is willing to pay potential financial advisor recruits a better deal if they move client assets to the firm’s in-house money management system, WealthPort.

Meanwhile, industry bankers and consultants who were not familiar with the exact details of Cambridge’s strategy said a firm setting a 20% floor when investing in an RIA was a standard path for purchasing a chunk of a firm instead of the entire business.

“This is the kind of strategy that a lot of firms are using, from big firm to smaller” branch offices, known as OSJs, said Carolyn Armitage, an industry consultant. “These kinds of purchase agreements also may have a first right of refusal for the buyer. In cases like that, the buyer is trying to lock up advisors’ businesses so they don’t lose it to a private equity buyer down the road.”

“The market is seeing a variety of strategies at work here,” said Larry Roth, managing partner at RLR Strategic Partners. “Some firms are buying minority interests in RIAs and using convertible debt or convertible preferred shares, and it ranges from 20% to 40%. They don’t want to own the business outright but catch the economics of the upside and benefit of the cash flow.”

“Other buyers want to own a minority stake and then, over time, buy the rest of it,” Roth said. “It makes sense because the firm is already on the platform and the clients are already on board.”

“Ultimately, the buyer wants to hang onto the clients, who are the same age demographic as the financial advisor,” he said. “The advisor wants to get out of the business at 65 or 70 but clients will live to be around till 90. The buyer is thinking, if we own part of the RIA, we should eventually be able to keep the clients.”