Seeking new business, Blucora to buy employee RIA for $160M

As independent broker-dealers seek flexible services, the largest tax-focused firm is betting big on a new RIA employee channel.

Blucora — the parent of newly rebranded IBD Avantax Wealth Management — agreed to pay $160 million to acquire HK Financial Services, the Dallas-area firm said Jan. 7. The CPA-focused RIA has employee advisors, including some registered representatives of ProEquities, who manage $4.4 billion in client assets through 75 accounting firm partners.

The accounting partners enabled Iowa-based HK Financial to generate $31 million in revenue for the 12 months ending Sept. 30 through “well-coordinated” referrals to the firm for advisory, brokerage and employer-plan services, Blucora CEO John Clendening said in prepared remarks on a call with analysts. Blucora expects the deal to close by the end of the first quarter.

Acquiring HK Financial will give CPA firms a different way to branch into wealth management under Blucora by joining the advisor referral program. IBDs are ramping up services beyond traditional business models through alternate corporate RIAs with more custodial options, fee-only resources and channels for wirehouse breakaways or employee advisors.

Blucora, which also owns tax software TaxAct, purchased 1st Global last year for $180 million and combined it with the former HD Vest to form Avantax. The ability to bring 401(k) recordkeeping and administration in-house, offer a succession option for retiring advisors and open more avenues into tax practices explains how the HK Financial acquisition will be complementary, Clendening says.

“The simple implication is we ought to close more business by offering tax professionals and CPAs more options to better serve their tax client base while transforming the value of their practice. And, there is so much opportunity ahead of us,” Clendening said.

“Given the fundamental differences in business models, and preferences of tax professionals as described earlier, HK Financial Services will be run as a third division of Blucora, with very little integration and no overlap, eliminating risk of disruption to the Avantax advisors,” he added.

It wasn’t immediately clear how many advisors would switch their BD from ProEquities to Avantax as a result of the deal. HK Financial's current preferred custodian is Charles Schwab, while Avantax uses Fidelity Clearing & Custody Solutions' National Financial Services. HK Financial already uses Fidelity as its primary custodian for retirement plan assets, its latest SEC Form ADV brochure shows.

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Representatives for Blucora and Fidelity didn’t respond to requests for comment on the timing of any potential BD or custody switch. A spokeswoman for Schwab declined comment.

"ProEquities has enjoyed a wonderful partnership with HK Financial for the last 20 years, and we are proud of the role we have played in supporting their success over this time," spokesman Michael Dugan said in an emailed statement.

HK Financial receives about 65% of its referred wealth management revenue from the CPA partner firms participating in the program, according to Blucora. The 401(k) administration will bring the acquiring firm more business, while the seller can take in more revenue by bringing about $250 million in brokerage assets onto Blucora’s platform.

“Blucora embodies our mission to take a holistic approach to serving our clients’ wealth management needs, and is the ideal partner for HKFS,” President Louie Rosalez said in a statement. The firm services 4,100 advisory clients and 11,000 retirement-plan participants.

Clendening has said Blucora expects its wealth management revenue to top $500 million after the addition of 1st Global last year. The latest acquisition could also help boost the firm's annual revenue into the top 15 from No. 19 in Financial Planning's most recent IBD Elite ranking.

The purchase price represents a multiple of 9.3x to expected EBITDA this year from folding in HK Financial into Blucora, financed through a term loan add-on of $165 million to Blucora’s existing debt. The acquiring firm anticipates the deal could add more than $21 million in adjusted annual EBITDA by 2023, including $6 million in “synergy” from buying HK Financial.