The Best-Laid Plans...
It is a rare adviser—or advisory firm—left unscathed by the recent market tumult. The headlines are replete with the toll exacted on all the major wirehouse firms. Less widely understood or appreciated is the impact on independent advisory firms, and perhaps none so much as National Retirement Partners (NRP), arguably one the nation’s largest and most ambitious adviser networks.
CEO Bill Chetney says his goal has always been to be the largest distribution entity within the retirement space, and he thinks that NRP has reached that point. “I’m in the distribution business so I can turn on the dime.” he says—and that nimbleness was surely tested in the waning months of 2008 and early 2009.
As NRP grew out of its 401k Advisors USA roots in 2006, the firm embarked on a growth-by-affiliation strategy (after the handful of “core” original firms, most of which are owned by NRP). Dick Darian, Executive Vice President at NRP, says that management was intrigued by the National Financial Partners (NFP) model, but wanted to keep things relatively contained. That led the firm to add a “complementary acquisition model,” he explains. “We made the foray [into acquiring firms] because of certain retirement firms wanting to be acquired…as much [as to develop] a secondary component of our core strategy,” Chetney explains. NRP had gotten to the point where it owned 15% of firms and, Chetney notes, he thought that they might own 25% to 30% of them eventually.
However, in hindsight, the timing of the firm’s new growth strategy was not ideal. “A number of things happened,” Darian admits, most notably that external capital dried up. Additonally, the forward-looking view of that model was not good as the market changed, says Chetney, who notes that the corporate infrastructure to support the affiliation model is “horrendous,” and it requires a substantial financial commitment, difficult to do without inflows of capital.
According to some of NRP’s acquired firms (who spoke with PLANADVISER on the condition that their comments remain anonymous), NRP was running short of money in the fall of 2008, and realized it had to come up with capital quickly. In a sense, the firm was confronted with its own version of the perfect storm: a market dropped, capital slowed, and acquired firms were not meeting the expectations set forth in their agreements with NRP. Others say it was a case of mismanagement and poor planning after inflated expectations. NRP’s growth model was not realistic, notes one adviser, who described the firm’s plans as being “champagne taste with beer money.”
Not that the business itself was a bad idea. The adviser agrees that the core business of a retirement-centric B/D is a viable business, “maybe more than ever,” but cautions that the distraction of the acquisition model ate away at the firm’s capital and personnel resources. “Bill is a visionary,” says a previous NRP-acquired adviser, who says that the firm provided tools that advisers in the retirement plan space want, and that NRP as a B/D is helpful precisely because “they understand the business.” However, “NFP failed as the acquisition model,” the adviser says bluntly.
The Acquisition Model
That acquisition model was relatively simple, but, like other elements in the recent economic downturn, was ultimately predicated on things continuing to rise in value. When a practice was acquired by NRP, Darian explains, the adviser sold the legal entity of the firm and gave up one-half of revenues in exchange for cash and stock. NRP had protected earnings, meaning “we’re always allowed to get our piece,” Darian explains—an expectation that was increasingly difficult for firms to fulfill as the markets declined.
For example, he says, if an adviser had revenues of $800,000 and then sold the firm to NRP, the adviser kept half of the revenues ($400,000). However, when the market turned, if the revenues declined by 25% (to $600,000), NRP’s “protected earnings” structure meant that while NRP kept its right to the $400,000, the adviser would be left with $200,000, a 50% cut in income. That, as Darian acknowledges, was a hard pill for some advisers to swallow. “They get 50% no matter what,” says one adviser, noting that was a difficult thing to make up when the markets went down. For many firms that signed up during the boom time, it was anticipated that things would continue to go well, and they’d “never need to worry about that.”
Additionally, the management of the acquired firms, was not handled as well as it could be, advisers say. When a firm was acquired, the advisers became contracted employees and NRP was supposed to pay various expenses—and there were some unanticipated human resources issues in managing the practices, says an adviser.
That, and NRP’s rapid growth, meant that the firm ultimately lacked the resources to manage those transactions. “They were trying to improve the systems before they had solutions in place,” the adviser notes, adding that the varying sizes of the practices—and financial obligations—acquired “may have affected the level of hurt.”
“Bill built a system where everything had to work,” one of the advisers says. As all the acquired firms had equity stakes, that meant that those firms were sensitive to how resources were deployed. In hindsight, some acquisitions may have been questionable—but NRP, like many firms, was caught up in the fast-moving world. “No one realized how big one mistake [in firm selection] could be,” another says.
When NRP management looked at the acquired firms, Darian says, they realized the firms tied up a significant amount of capital, and that selling back to the advisers was a viable solution, an option agreed to by investors in late 2008, according to a source at the meeting where it was presented. Overall, half of the acquired firms were sold back (it was generally the more recent acquisitions, Darian says, with NRP retaining the “core six or seven”).
Darian says that, for NRP, the buyback meant significant cash flow, a reduction of the number of investors and outstanding shares, a slimming of the accounting group, and an overall reduction in expenses. Chetney notes that NRP now owns about 8% of the firms. Each is still a member of NRP, albeit reverted to an “affiliate” status.
Future Plans
Although Chetney says the company’s intent is to “stay independent for the foreseeable future,” and that “we’ve built this company on a foundation of being a strong, profitable operating company as opposed to something that is being built for sale,” both he and Darian admit that the acquisition strategy was not something in which investors were interested and even NRP had questions about how that might be valued.
Despite the problems, and the inevitable angst about the restructuring, “most of us are happy” because it saved the company, says one adviser. “My biggest fear was that they’d sell it in a fire sale—that I’d end up working for a bank.”
Chetney says NRP already has acquired a firm in 2009, though he maintains that NRP is “de-emphasizing that as a focus…primarily due to the cost of capital.” In addition, Chetney, who once said his goal was to reach 200 firms by the end of 2009, has seen NRP reach the 150-office milestone. What all this means for the newly acquired or affiliated firms, NRP, those who are still in the process of buying back their practices, or the model in general, remains—as do many things in the advisory business in the current environment—unclear.