First United Bank in Durant, Oklahoma wanted to expand its wealth management business. For most banks, the next step would be to buy an existing provider. First United took a slightly different, more cautious approach.
The $ 11.6 billion-asset First United announced last month that it had acquired a minority stake in Exencial Wealth Advisors in Oklahoma City. The partners did not disclose terms of the deal or the size of First United’s ownership interest.
The transaction is the second in less than two months involving a community bank taking a minority position in a wealth management provider. The $ 7.7 billion-asset Amerant Bancorp in Coral Gables, Florida, announced June 28 that it had invested $ 2.5 million in Marstone, a wealth management fintech based in Providence, Rhode Island.
Having a minority partner is not rare for wealth management firms. What is unusual about Exencial’s arrangement is bank involvement, Dan Sondhelm, CEO of Sondhelm Partners in Alexandria, Virginia, said in an interview.
“Banks don’t necessarily do this,” Sondhelm said, adding he was unaware of others that have acquired minority stakes. Sondhelm Partners provides marketing and consulting services to clients in the wealth management space.
John Burns, Exencial’s founder and CEO, said he too was unaware of other wealth management firms with banks as minority partners.
“I don’t know if it’s unique, but I don’t know of any other partnerships coming together this way,” Burns said in an interview. It’s more common for companies to merge completely, he said.
Why not buy?
When First United decided to expand its wealth management product set, its initial thought was to buy a firm outright. It didn’t take CEO Greg Massey and his team to discover a big flaw in that plan.
“When we started exploring different wealth groups… the problem was most of them were in retirement mode,” Massey said in an interview. “We were looking for a partner that knew how to grow and scale the organization, just like we have grown and scaled First United Bank.”
The partnership with Exencial follows a course that First United charted nearly two decades ago, when the bank began expanding its mortgage operation. It added commercial insurance and has long aimed to upgrade wealth management.
“It took us longer to get those other business lines to the level where we thought it was time to really start focusing on wealth advisory,” Massey said.
Now, as a result of its investment, First United customers will gain access to Exencial’s wealth management services, including estate planning, investment management and tax and accounting services. The door also opens for Exencial clients to tap First United for private banking, commercial lending, insurance and mortgages.
Prior to connecting with Exencial, First United offered a basic suite of wealth services through LPL financial. The bank has no plans to sever this relationship. It views Exencial as an expansion to its wealth management offerings, rather than a replacement for LPL.
“LPL is a great platform for buying mutual funds, different types of annuities and stocks at a pretty low cost,” Massey said. Exencial “can focus more on wealthy clients who need different types of services.”
There should be no shortage of business. “We have more than 300,000 customers,” Massey said. “A lot of our entrepreneurial clients own businesses. Our jumbo mortgage business is large, as well. We run into customers every day that need wealth advice. “
Massey has high hopes for Exencial. The firm currently has about $ 4 billion under management. “We expect it to be a $ 20 billion firm in the next five to 10 years,” Massey said.
Sondhelm, too, said he liked First United’s arrangement with Exencial – especially since it leaves Burns with significant skin in the game.
“That’s really important if he’s the one who is supposed to drive growth,” Sondhelm said.
‘Partnerships are… the new M&A’
Even so, the partnership arrangement that First United struck with Exencial is unusual. Deals where banks purchase 100% of a wealth management firm are not only more commonplace – they’re on the upswing. Examples include US Bancorp’s planned acquisition of PFM Asset Management, announced July 8; and United Community Banks’ deal for FinTrust Capital Partners, which closed July 7.
The $ 5.8 billion-asset Peapack-Gladstone Financial in Bedminster, New Jersey, closed a deal for Princeton Portfolio Strategies July 1.
Though comparatively rare, the First United-Exencial relationship is unsurprising, said Sid Khosla, managing partner of financial services strategy and transaction at EY. Private-equity funds, insurers and other big financial institutions have used minority partnerships for some time to navigate the wealth management space. Northwestern Mutual’s purchase of online financial planner LearnVest, for instance, came after an initial minority investment, Khosla noted in an interview.
“We do believe partnerships are going to be the new M&A,” Khosla said.
In addition to offering an effective means for a bank to leverage scarce capital upgrading its wealth management capabilities, a minority partnership gives it the option of buying the firm outright at some later date. It’s also easier to walk away if things don’t work out as planned.
“Maintaining that optionality becomes important,” Khosla said.
A partnership lets both First United and Excellency concentrate on what they do best. For First United, that means remaining focused on its core competency of community banking, while at the same time offering what it believes are best-in-breed wealth management services to clients.
“Firms are trying to make sure their roles in the broader ecosystem stay clear and sharp,” Khosla said.
Massey stressed that same point. “We’re investors in this space, but we really don’t know this space,” First United’s CEO said. “We really needed a team like [Exencial] to come in and help us. “
Exencial was attracted to First United’s promise of patient capital. As a long-term investor and partner, the bank’s capital allows it to spend on attracting new advisors, pursuing M&A opportunities with other wealth firms and upgrading technology without having to worry about cashing anyone out a few years down the road, Burns said.
“We had lots of other choices for potential investors, some firms that we respect a lot, but nothing as strategic as this,” Burns said. “First United Bank and the Massey family are committed… as a source of permanent capital, which means we can make good, long-term decisions. We’re not forced to think short-term. “
Massey agreed, emphatically, saying the partnership model would be in place for the foreseeable future, and that First United could provide additional capital to fuel Exencial’s growth. “To grow into a significant firm, you’ve got to have a good partner not only from a referral perspective but also a good capital partner that can continue to invest in different ways.” Massey said.
“We’re always playing the long game.”