Tuesday, November 20, 2012

Same As It Ever Was?



Now that the dust has settled on the Luminous sale, it’s worth wading through all of the hype and surprising professional jealously to analyze the merits of the transaction.

When you consider the poor track record of banks making wealth management acquisitions, it would be too easy to conclude that another dumb bank has just bought another wealth advisory firm built by "smart" Wall Street pros.

In the late 1980s, Bank of America bought Charles Schwab & Co. and then sold it back to the founder for pennies on the dollar.  In 2000, State Street made the same mistake.  It bought Bel Air Investment Advisors and sold it back to the founders, again for pennies on the dollar.



This Time May Be Different

Why didn’t those investments succeed?

Previous transactions failed because the acquired firm was not a strategic fit. Equally as important, the bank wasn’t fully committed to integrating the firm into its macro business plan.  The new wealth management firm was just too small to matter to a megabank.  When you factor in the typical internal politics in any big organization, the challenge was too great to overcome.


Fast forward to Luminous.  This is a team of rock stars.  When they broke away from Merrill in 2008, they were the firm's  largest, fee-only team.  Upon exiting Merrill, the partners had numerous opportunities to grab very large recruiting checks by going to another Wall Street firm, but they turned them all down.

Why? Because they did not want to be subjected to the same constraints that were hindering their business at Merrill.

Their instincts proved stunningly correct. In the four years since they left Merrill, Luminous grew from $1.7 billion to $5.5 billion at the time of their sale.

Luminous achieved this breath-taking feat by combining two highly effective strategies 1) They adopted the best growth practices from Wall Street 2) They were very disciplined in executing their  independent, business model.

In the process, they reconfirmed the breakaway value proposition: Highly attractive after tax compensation and complete control over your own destiny.



The Instagram of Wealth Management

For those familiar with Facebook, this transaction for First Republic reminds us of Facebook’s purchase of social media darling Instagram in April, just before its IPO.

Facebook recognized that their users couldn’t easily take and share pictures – a highly valued feature in social media.  Facebook addressed its suboptimal photo interface by buying Instagram’s technology for $1 billion, a price considered rich by many.

Along the same lines, First Republic bank realized it wasn’t as successful in wealth management as it would have liked. It has an incredible brand that provides high-end mortgage solutions, and has been seeking to expand its wealth management capabilities for many years.

The difference between the Luminous deal and other misguided wealth management acquisitions is that First Republic is small enough and nimble enough to make it work.  Luminous is truly integral to First Republic’s long-term wealth management strategy. Moreover, the bank has the organizational commitment and discipline to make the most of this blockbuster deal.

And, regardless of the "actual" sales price of $125 million to $200 million, the deal came with a very nice kicker – a treasure trove of leads that would even make the Glengarry Glen Ross sales team happy.



You know, this just might work.