Our US correspondent takes a look at Cresset's merger with a non-discretionary consultancy, aka outsourced chief investment officer – and not an RIA. He talks to industry figures about the rationale for the deal, and what it says about wider trends.

Cresset, the RIA and investment powerhouse founded just eight years ago by Chicago businessmen with no wealth management experience, is on the cusp of claiming an eye-popping $200 billion in assets. That follows its merger with Denver-based investment consultant Monticello Associates.

However, not all of the assets are under management â€“ the wealth management industry’s gold standard. 

Monticello is a non-discretionary consultancy, also known as an outsourced chief investment officer (OCIO), not an RIA; the $124 billion it oversees for institutions and wealthy private clients are assets under advisement. Cresset Asset Management manages $72 billion for wealthy families and individuals and its parent company, Cresset Capital Management, owns several investment subsidiaries.

The Cresset-Monticello union underscores two accelerating M&A trends. One is increased M&A activity by ultra-high net worth RIAs. UHNW firms have historically accounted for a small percentage of transactions. But according to M&A consulting firm DeVoe & Co, deal activity by UHNW firms has surged to about 20 per cent of the market.

“Cresset, Cerity, Pathstone and other consolidators have raised the competitive bar in the space, and an increasing number of small and mid-sized UHNW firms have taken notice,” David DeVoe, CEO of his eponymous RIA M&A strategic consulting firm, said. “We expect to see continued strength in this part of the M&A market.”

Targeting OCIOs
The Cresset-Monticello deal also highlights the trend of large financial aggregators acquiring OCIOs to increase assets, broaden their target markets, add investment management capabilities and diversify revenue channels in preparation for a potential initial public offering. Hightower, Creative Planning, Mariner Wealth Advisors and Cerity Partners have all made OCIO acquisitions in the last few years.

“Cresset is the latest RIA to merge with an investment consultant, which boosts assets under advisement quickly,” Chip Roame, managing partner, Tiburon Strategic Advisors, said. “This deal puts Cresset in a select tier of the largest and most multi-faceted RIAs.”

Which was certainly Cresset’s intention. The firm aims to be “the preeminent family office and investment advisor in the United States,” according to Avy Stein, a Cresset founder and co-chairman. While Cresset’s $72 billion in AuM still lags far behind industry leaders like Creative Planning, Mariner and Hightower, Stein claims that those firms are in “a different business. They don’t have the depth and breadth to serve the ultra-high net worth market.”

UHNW Holy Grail
Indeed, the strategic case for partnering with Monticello is to expand Cresset’s reach into the UHNW market even further. 

Monticello focuses exclusively on families with at least $100 million, according to Grady Durham, Monticello’s founder and executive chairman. Adding that market “is very accretive to us,” Stein said. It also allows Cresset to have more exposure to, and credibility with, foundations and endowments, which make up the majority of Monticello’s client base.

Some industry observers, however, questioned the logic of the deal, noting that investment consultancy is a low margin business and that while working with private clients is more profitable, that segment makes them less than half of Monticello’s client base.

“What business do they want to be in?”
“Foundations and endowments are a different business from Cresset’s ideal client,” said Jamie McLaughlin, a UHNW industry consultant. “What business do they want to be in?” Speaking on background, one veteran CEO praised Cresset’s success as investors in alternative assets and multi-family office advisors, but added that the Monticello deal puzzled him. “I don’t see how one plus one equals three here,” he said.

Durham responded that Monticello’s revenues are split 50-50 between institutional and private clients and that the firm “serves the highest component of the family office space.” Combining Monticello’s investment team and institutional expertise with Cresset’s resources will, according to Stein, allow the combined firms to become one of the industry’s “largest capital allocators with access to a lot of investment opportunities.” 

It's a variation on “a classic theme,” according to Tim Welsh, president of Nexus Strategy. “Take the institutional to the individual, where the margins and basis points are dramatically higher.”