Mercer adds $845 billion in advised assets with acquisition of two investment consultancies

Mercer’s announced acquisition of Canadian-based Pavilion Financial Corporation and St. Louis-based Summit Strategies Group will augment the firm’s alternative asset, not-for-profit, and wealth management consulting capabilities.

Pavilion’s $685 billion in assets under management made it the 13th largest investment consultancy in 2017. Summit’s AUM was $160 billion at the end of 2017. In a release, Mercer cited the strength of Pavilion’s alternative asset consulting capabilities and its Canadian private wealth management business, and Summit’s reach in the not-for-profit space.

The acquisition move was driven, in part, by Mercer’s acquaintance with the firms’ defined contribution consulting talent, said Rich Nuzum, president of Mercer’s global wealth business, in an interview.

“Sponsors tend to buy the lead consultant,” said Nuzum. “Both Pavilion and Summit have very strong defined contribution investment consultants. We are bringing on great lead consultant capabilities, and a strong client base.”

Pavilion consults on $85 billion in defined contribution assets, according to its website. Summit consults on plans ranging in size from under $100 million to $5 billion across the DC spectrum, with a focus on 403(b) hospital plans.

Nuzum describes Mercer as being “modestly acquisitive” over the past decade.

“We have a high quality bar for acquisitions, and we feel like we know the talent well at both firms. There are a lot of firms available for acquisition that wouldn’t meet our quality threshold,” he said.

The impetus behind the acquisitions was strategic and financial, said Nuzum. Beyond defined contribution plans, Pavilion has a specialty advising insurance company portfolios. Mercer intends to fold the Pavilion brand into its not-for-profit and insurance client consultancies, according to the release.

Both Pavilion and Summit offer outsourced chief investment officer (OCIO) services astride traditional consulting services.

Nuzum said the acquisitions will provide “concrete benefits” for Mercer’s existing defined contribution clients.

“Defined contribution sponsors care about fees,” he said. “This will help us drive down fees for our clients.”

Investment managers traditionally provide aggregated fee treatment for OCIO accounts. More recently, some fund companies are offering aggregated fee treatment for advice-only accounts, said Nuzum.

“If a consultant has 10 clients that use a given strategy, some managers will aggregate assets across those 10 clients’ accounts and charge all of those clients a lower fee, based on the aggregated total, as opposed to charging them each the higher fee that would apply if their smaller accounts were each considered and priced separately,” explained Nuzum.

“More managers are electing to mirror the scale economies industry commonly offers OCIOs in offerings to non-discretionary investment consultants. For clients that use managers that offer this type of aggregated fee treatment, there is clear benefit to working with a consulting firm that has larger assets deployed across its clients with that manager,” he added.

The acquisitions will also advance Mercer’s ability to meet sponsors’ and industry’s evolving imperative on financial wellness.

“It’s not a one-size-fits-all world anymore,” said Nuzum. “More sponsors have to customize savings arrangements. The acquisitions will better equip us to capture innovation in financial wellness, and push industry to innovate.”

The costs of the acquisitions were not disclosed in Mercer’s release. Each is subject to shareholder and regulatory approvals, and are expected to close in the fourth quarter.

The lower corporate tax rate resulting from the Tax Cuts and Jobs Act did not have a direct consequence on Mercer’s decision, said Nuzum. But he did note that some of the firm’s competition have re-domiciled overseas in recent years to take advantage of lower tax rates. The lower rate in the U.S. has helped level the playing field for New York-based Mercer, he added.