A midsize wealth manager is boosting its annual revenue by 40% and its advisor headcount by 75% through its first major M&A deal.
Arete Wealth agreed to purchase Nashville-based Center Street Securities, which has 112 advisors and $1.04 billion in total client assets, the firms said Jan. 15. The parties didn’t disclose the financial terms of the deal, which is expected to close next week ahead of FINRA’s 30-day waiting period for approving the formal merger, Arete founder and CEO Josh Rogers said in an interview.
As the No. 47 firm on Financial Planning’s IBD Elite rankings, Chicago-based Arete generated $36.5 million in revenue in 2019. The firm’s revenue jumped by 21% in 2019, and it has a specialty in alternative investments for high-net-worth and ultrahigh-net-worth clients.
Under the deal, Arete will reach $5.5 billion in client assets managed by 265 registered representatives.
“This is the first large acquisition that we’ve made in 13 years of being in business,” Rogers says. He notes that Arete — whose name comes from an ancient Greek word meaning “excellence” — had earlier focused its attention on organic growth. “This particular combination just made a lot of sense, so we’ve embarked on the M&A trail,” Rogers adds.
The sellers were attracted to Arete’s compliance services such as the firm’s in-house legal team; its errors and omission insurance coverage; and the ability to use more custodians, enhanced technology and additional investment banking services, according to Center Street CEO J.R. Thacker. He says he probably wouldn’t have done a deal with any other IBD.
“I wasn’t really looking for a buyer or looking to sell,” Thacker says. “Arete had a lot of the infrastructure that I was planning on building over the next few years, and this ended up being a more expedient way to bring that to all the reps.”
The deal follows the eighth straight year of record numbers of M&A deals in wealth management, as well as a new high of 78 acquisitions of firms with at least $1 billion in client assets, according to investment bank and consulting firm Echelon Partners. The record consolidation has reshaped the IBD sector in recent years.
Arete and other midsize IBDs with alt specialties such as SFA Partners, DFPG Investments and Cabot Lodge Securities have established strong footholds in the fractured sector, says recruiter Jon Henschen of Henschen & Associates. The focus on alts requires “phenomenal due diligence” over products to avoid costly litigation, Henschen says.
“Smaller firms that are generalists just can’t compete,” he says. “You’ve gotta specialize in something and do it well. If you do it well, it can be very profitable for them.”
Arete’s acquisition of Center Street also stands out in that it didn’t involve any private equity capital or the larger IBDs that usually strike billion-dollar deals, according to recruiter Jodie Papike of Cross-Search.
“It’s very difficult for very small firms to navigate the regulatory landscape,” Papike says. “The midsize firms that are privately held that are still left in the industry are doing really well financially.”
Once combined, the parties expect to distribute $250 million worth of alts investments in 2021, based on their business in prior years, according to the firms. Within alts, Arete tends to work with Regulation D offerings for accredited investors, while Center Street puts more emphasis on publicly registered offerings for non-accredited investors, Rogers says.
Center Street’s holding company, broker-dealer, RIA and insurance agency will shut down following the 100% stock transaction, according to Rogers. The selling firm’s reps will start using the Arete brand later this year as well.
“Our main focus is on maximum retention of all advisors and clients,” Rogers says, describing the firm’s approach as “keeping all the existing infrastructure but then adding a bunch of services and technology” for the incoming reps.
Although Arete doesn’t plan to offer retention bonuses for the Center Street reps, it will retain Thacker and other staff. Thacker, who is also an advisor, bought the 31-year-old firm once known as Elliott Financial Services in 2007. Rogers praises Thacker’s talent for training advisors in practice management and sales.
“Some of them don’t want to admit that they need that kind of help,” Rogers says. “He has that energy, the drive and the ability to connect with advisors on, ‘Here’s what I’m doing in my practice.’ That’s the kind of skillset that we really could use more of at Arete as well.”