As the Feds were closing Silicon Valley Bank three weeks ago, I was heading to Key West with my wife and another couple for some sunshine and R&R. My counterpart on the trip, Dave, reflected on a Spring Break trip fifteen years earlier when his employer at the time, JPMorgan, put together a financial assistance package for Bear Sterns on a Friday and ultimately bought it two days later for $2 a share.
Markets move fast, even when you think you are on vacation. First, it was Silicon Valley Bank, then Signature, then other West Coast banks looked vulnerable, then people asked about Schwab, and then the crisis moved to Europe. It’s revealing to see how pundits have critiqued SVB and Credit Suisse, but we should have expected the whipsaw in rates to overstress something in the system, even what were otherwise excellent franchises. And it highlights a significant risk to the RIA community: the loss of control that comes with consolidation.
The Buck Stops Here
Key West has plenty to recommend, which is probably why Harry Truman spent much of his presidency at a smaller version of the White House configured for him at the naval base there. The house was restored twenty years ago, and if you pay up for the white glove tour, you not only get a behind-the-scenes tour of the house but also a ride around Key West in one of Truman’s limousines—a 1950 Lincoln Cosmopolitan. White walls, siren, an intercom, and lots of legroom, but no air conditioning.
A big part of Truman’s legacy is tied to the dawn of the nuclear age. Truman was unaware of the development of the atomic bomb until President Roosevelt died and left him in charge. Reportedly, he authorized the bombing of Hiroshima, but after the military decided to use a nuclear weapon in Nagasaki, Truman intervened and put the U.S. nuclear arsenal under civilian authority—where it remains today. Truman didn’t have much experience in world affairs before becoming president, but he understood the importance of control and who had it, which brings me to the topic of this blog.
SVB and the Nuclear Option
While the banking narrative that brought down Silicon Valley Bank is a quick read, the secondary and tertiary effects of this latest banking crisis will take longer to become apparent. The collateral damage was not limited to SVB’s dynamic banking franchise. SVB Asset Management, formed in part by the acquisition of Boston Private less than two years ago, is still very much caught in the storm.
SVB Asset Management was a huge success, growing from less than $20 billion at the time of acquisition to $85 billion on their most recent ADV. No doubt Boston Private advisors were patting themselves on the back until about three weeks ago. Now they’ve spent weeks in limbo only to be taken over by a regional from North Carolina. With all due respect to my alma mater on the Piedmont, Raleigh just doesn’t have the same ring as Silicon Valley (although Chapel Hill Private has panache…).
Diversification is a double-edged sword
Diversification is a double-edged sword. JP Morgan isn’t perfect, but it has found a balance between running a spread business and capitalizing on fee income opportunities. Jamie Dimon presciently said that he wouldn’t take duration risk just to defend JPM’s net interest margin, and now his wealth management advisors aren’t facing a crisis of confidence from their clients. Silicon Valley ran the bank too hot, and now the money management business is in jeopardy.
Selling Control is Losing Control
The fate of Boston Private’s advisors in the SVIB collapse is a tragic reminder that selling control of an RIA also means losing control of that RIA. They aren’t the only example.
Selling an RIA is often referred to as an “event,” but really, it’s the beginning of a new business relationship. Often the sellers will remain connected to the RIA, whether because of an earnout, rollover equity, ongoing employment, client relationships, or longtime relationships with other ongoing employees. It’s great when it works, but it’s very unclear what to do in the event that it doesn’t.
A few weeks ago, I blogged about the predicament of RIAs that sold to Focus Financial, only to have that firm go private with a new private equity owner. When Focus went public in the summer of 2018, I noted that they were a successful acquisition model, but it would be a challenge to transition that to being an operating model. Here we are.
Consolidation is, for most target companies, a one-way street
Any seller whose acquirer doesn’t perform as expected might want to unwind their relationship – but it’s usually unclear how that might be accomplished. Consolidation is, for most target companies, a one-way street. It’s hard to find a precedent, much less financing, for de-consolidation. And negotiating your way out of a consolidator is a lot trickier than negotiating your way in.
It’s more than a little ironic that many RIAs get their start because the founders want freedom from the constraints of a large corporation, only to build a successful business that ultimately gets resorbed into another large corporation. There are workarounds, like minority partners, but even then, the devil is in the details. Measure twice, cut once.
I’m from Missouri
Harry Truman kept a sign with his personal slogan, “The Buck Stops Here,” on his desk. The reverse side of his sign, which faced the President, says, “I’m from Missouri.” Specifically, Truman grew up in Independence, Missouri, and took pride in his hometown. RIAs would be well advised to value their independence as much.