Mergers bring adviser opportunity

Mergers and acquisitions among major financial services firms and the current economic climate present financial advisers with a high-powered combination of stress and opportunity.

"The unprecedented turmoil in the financial markets and the resulting meltdown of some of the biggest firms on Wall Street has forever changed the look of the industry," said Dan Scott, a Springfield wealth adviser with Denver-based Cascade Financial.

"Any type of turmoil, while it creates headaches for some, creates opportunity for others," said Jeff Jones, assistant professor of finance at Drury University.

Scott agreed.

"Easily the biggest change I see is the influx of smaller firms entering the Springfield market," he said. "They are trying to take advantage of the frustrations that large producers at the national firms are feeling."

Mergers and acquisitions are certainly nothing new to the financial sector, and recent years are no exception. 2008 saw JPMorgan Chase's merger with Bear Stearns and acquisition of Washington Mutual, for example, and 2009 also has been busy, with transactions including Bank of America's acquisition of Merrill Lynch, Wells Fargo's merger with Wachovia and Morgan Stanley's acquisition of Citigroup's Smith Barney.

Merge and purge

Megafirm mergers do seem to be driving the launch of new firms, among them St. Louis-based Benjamin F. Edwards, which opened its first branch office in Springfield Aug. 17.

The opening of the new firm by the Edwards family, progenitors of the storied investment firm of A.G. Edwards, "was definitely the result of the sale of A.G. Edwards to Wachovia and then the ultimate buyout of Wachovia by Wells Fargo," said Robin Walker, managing partner of Walnut Capital Management and an investment industry veteran. (See a Q&A with founder Benjamin F. "Tad" Edwards IV on page 14.)

The new Edwards firm revives the old A.G. Edwards culture that was lost in the M&A shuffle, Walker said.

Walker racked up 25 years with large brokerage houses before launching Walnut Capital with partners Jay Handy, Elizabeth Collins and Jonathan C. Timson in 2007. Walnut Capital Management contracts with Wells Fargo as its broker/dealer.

After 19 years at Merrill Lynch without a single merger or acquisition, Walker spent six years as a branch manager for Smith Barney shortly after its merger with Dean Witter. He saw the impact of clashing cultures that can come when large firms merge.

"Originally, the name was Morgan Stanley Dean Witter, but when they did away with the Dean Witter name, there was still that Dean Witter culture there that they were proud of, and it was divisive in the overall firm," Walker said.

After a merger, cultural clashes and upheaval in leadership and supervision may drive advisers out the door, but not necessarily into the arms of other Wall Street behemoths. Instead, an ongoing trend is for financial advisers to go independent, starting their own firms or joining small investment houses.

"Many firms and advisers are leaving the business, but in my lifetime there has never been so many people looking to move their assets, especially families with large accounts," Scott said. "I think this is why we are also seeing some of the more successful advisers wanting to move their practice to an independent firm."

Walnut Capital Management is benefiting from large mergers in regard to staffing, Walker said, as well as assets under management.

"We've hired some fantastic financial advisers this year, and we've grown our practice substantially as a result of all of this," Walker said.

Walnut Capital Management has hired four new staffers, three on the broker/dealer side of the business and one in its separate asset management practice.

As a result of the new advisers, and recent market gains, Walnut Capital's assets under management have essentially doubled, Walker said, though he did not disclose total asset figures.

That's not to say, however, that there will be conflicts every time a merger takes place.

"In many cases, if the firms are similar in nature and have targeted similar types of customers, then that's a relatively easy transition," professor Jones said. "If you're in a situation where that's not the case - you have very different sales structures, (products) or whatever - that could be quite challenging."

Shakeout, shakeup and competition

The bull market drew many people to enter the financial advisement arena, but the bear market is driving some of them right back out.

"We've probably seen a pretty good shakeout of the marginal brokers in that industry," said James Philpot, Ph.D., assistant professor in Missouri State University's department of finance and general business.

Drury's Jones agreed, noting that the same thing happened in the real estate industry.

"You had jillions of real estate brokers; they were everywhere," he said, noting that now, those numbers have shrunk.

As investment markets rebound, major firms are targeting top producers with significant rewards and correspondingly high-growth expectations.

Reuters reported Nov. 11 that Morgan Stanley, which announced its acquisition of Citigroup's Smith Barney in January, is offering top brokers up to 330 percent of their annual fees and commissions over five years.

But the option of going independent may make attracting and keeping top talent more challenging, Walker said.

"If you've got successful people in the firm, those people then typically have the financial wherewithal to be able to make a move and go independent," Walker said, noting that mobile technologies also make going independent more feasible.

Advisers who work on a fee basis face a challenge similar to that of brokers: Investors don't use their services as much when the market is down.

"Investors tend to hang out of the market for a while until they're convinced of its stability, or convinced of stability in their own jobs," Philpot said. He said that this is counterintuitive because when times are bad, "the role of a financial adviser, a financial planner, in adding value can probably be so much greater."

Recent market improvements, however, are bringing a new sense of urgency to many who have been hesitant to reinvest, Jones said.

The Dow Jones Industrial Average closed Nov. 16 at 10,407, down 26.5 percent from the all-time high of 14,164 on Oct. 9, 2007. The Nov. 16 close reflects an increase of roughly 59 percent from the March 9, 2009, low of 6,547.

"We're over 50 percent up from where we were at the bottom, which is a significant statement."[[In-content Ad]]