10 tips from expert dealmakers on navigating RIA M&A

June 26, 2023 3:48 PM

Financial advisors considering whether to buy or sell their firms will be wading into much different waters than the conditions of a year or two earlier, according to dealmaking experts.

The average client assets per transaction and the number of billion-dollar firms under new ownership are rising, as private equity-backed acquirers like Carson Group and OneDigital Investment Advisors unveil major transactions.

In a panel last week in New York, Marc Cabezas, executive director of mergers and acquisitions at Chicago-based Hightower; Raj Bhattacharyya, CEO of San Francisco-based RIA Robertson Stephens; and Brandon Kawal, a principal with M&A advisory firm Advisor Growth Strategies, shared the 10 tips below to help advisors think through their positions in a competitive marketplace fueling industry consolidation.

Most registered investment advisor firms up for sale are planning to retire at some point over the next decade rather than after three or fewer years, according to Kawal. Current conditions also differ from 2021 and "the very early part of '22," when the change in presidential administration prompted anticipation of higher taxes that could have made future deals less attractive," he said.

"It is taking a little bit longer right now to get deals done," Kawal said. "We're seeing folks with a longer runway, a longer time horizon. And they're going to take the time they need to pick the partner that's best for them. And I think buyers are also saying, 'Hey, great, you know, let's do that. Let's take the time to evaluate.' It may be frustrating at times."

Omaha, Nebraska-based Carson Group completed its largest deal to date last week with the acquisition of Northwest Capital Management, a Portland, Oregon-based wealth management and retirement plan firm with 13 advisors and other employees managing $5 billion in client assets. Advisors Brent Petty and Fred Payne remain in charge of their team under Carson, which has $28.2 billion in client assets across more than 140 partner officers serving 46,000 households. The parties didn't disclose the terms of the transaction.

"Our affiliation with Carson will allow us to expand our resources considerably, gaining a larger support staff for client service, financial planning, investment research, portfolio analysis, trading and investment monitoring," Petty said in a statement. "This partnership will also provide us with new resources for our plan sponsor partners and their participants."

Overland Park, Kansas-based OneDigital purchased Armonk, New York-based StoneStreet Equity, a wealth and retirement plan consulting firm with $3.8 billion in assets under advisement, the firms said on June 22. Principles Spencer Goldstein and Heidi Sidley will continue to lead their team as well. The parties didn't disclose the terms of their transaction, either. StoneStreet had already been using OneDigital's RIA arm prior to folding into the new parent firm.

"We are thrilled to join OneDigital to harness the power of partnering our specialization in pension risk transfer and defined benefit plans with OneDigital's expertise and national reach in the retirement and wealth industry for the mutual benefit of all of our clients," Sidley and Goldstein said in a statement.

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To see their 10 tips for buyers and sellers in wealth management, scroll down the cardshow. For a look at why private equity capital keeps flowing into the industry, click here. And, to see five graphs displaying the pros and cons of RIA growth, follow this link.

Dating longer before marriage

The aspect of the dealmaking process that is lasting longer these days comes before the signing of a letter of intent, when buyers and sellers are "going from passive dialogue to a highly engaged dialogue of a partnership," according to Cabezas.

"Firms are willing to take more time to date, which at the end of the day is actually better for us because it helps further streamline the diligence process," he said.

Not always an immediate succession plan

While some acquiring firms are aiming to be the last career stage and succession plan for advisors, Bhattacharyya's firm is searching for sellers that bring added capabilities around client services and technology rather than a "founder wanting to retire and monetize," he said.

"Understanding why the seller wants to sell is really important to us," Bhattacharyya said. "That's not a good personality fit for us. We have not done an acquisition where the founder has retired in the first 24 months. And that would not work for us. Clearly there have to be stronger reasons beyond something like that and beyond pure monetization."

RIA valuation delusions

Mistaken expectations among potential sellers about the valuation of their firms represent red flags to buyers, according to Kawal.

"The market's become more efficient in our space. There's more buyers, there's more demand, there's more information available," Kawal said. "The numbers tend to sort themselves out. I think any sophisticated buyer in the space that's got capital is operating from a place of education in this regard."

When to consider outside capital

External investors can help fill gaps in RIAs and other wealth management firms involving talent, technology, client services and other operations, Cabezas said.

"One of the clearest signals that it may be time for firms to take on outside capital is if they see the firm losing out on opportunities that are in front of them based on inherent deficiencies in business," Cabezas said. "It ultimately comes down to whether they want to use that investment to build those capabilities themselves or seek a partner that actually already has those capabilities that they can leverage on day one. And then the third part of that, if they go through a partner that already has those capabilities, is what they're willing to give up in order to gain access to those value-added services."

Partial wallet problems

Client assets held outside of an advisory practice often present a compelling reason to consider some form of outside capital, according to Bhattacharyya.

"The key question becomes, how do you know that you have those gaps?" Bhattacharyya said. "And the way I think a firm should reevaluate that is if they're losing clients, or if they're unable to convert their target clients, maybe their Rolodex, the community in which they're in, because they're lacking something or — we find this in some of the situations we encounter — you have partial wallet with your clients and, however hard you've tried, you're unable to get the full wallet. That usually means there's some capabilities that are missing."

Technology troubles

Firms trying to roll together more than one disparate technology under their roofs should dedicate resources to the integration process, which is often similar to the time and effort involved with setting up a new personal computer, Kawal said.

"It seems really easy to implement new technology, right? And then you implement the new technology, and it's going to just work off the shelf how you want it to. It never does. It's always unfolding new problems that you didn't notice," he said. "Now you're dealing with people, emotion, psychology. You're dealing with end clients that everybody wants to be taken care of. There's just a lot that goes into the M&A piece."

Building a team through M&A

RIAs seeking the best advisors and team members can often find them through M&A deals, according to Cabezas.

"The talent war is real in this industry, and M&A is a great way to add talented people to an organization," Cabezas said. "Most firms are dealing with one of two things: how do I find the next high-quality client to bring in, or how do I find people who can serve the clients and the opportunities that are in front of us? M&A can solve those two things because you're adding talent to the organization either with the rainmakers, the servicing advisors or people that are in the back and middle office that can build scale and efficiency to the organization."

Devil in the details

Sellers seeking a cultural fit should speak comprehensively with a prospective buyer before any asset purchase agreement about "what life will look like for your employees, your junior staff, your clients, what changes, what stays the same, and not having misaligned expectations around where you keep things as they were and where things are going to get slightly different and where things might get very different," according to Bhattacharyya.

"If those conversations are not had in a very, very detailed manner before you've signed the APA, I think you can get into trouble," Bhattacharyya said. "So I think it's really important to understand, go into this in a level of detail that you may not have thought necessary. And I know that may not jibe with what people think of as culture, but culture also comes into the details of what it is that your employees and your clients are experiencing every day."

Sellers better educated

RIAs are displaying more sophistication around selling their firms than a few years ago, which enables them to make a quicker connection with buyers in some cases, Cabezas said.

"Even going back three or four years ago, we would come across firms that were just looking for a de-risking mechanism or to take chips off the table or have patient capital," he said. "Now you're seeing firms come to the first conversations being very proscriptive. 'This is what I do well, these are the things that I'm willing to give up, if you can provide X, Y and Z for me.' So I think the sellers seem much more educated on what their ideal profile is, in terms of what they're looking for in a partner, which obviously makes it easier on our end to self-select in."

Ready for change

When thinking about an outside investment, advisors should abandon any "pie-in-the-sky" notions that M&A deals are "all rainbows," Kawal said, noting that "there's no such thing as a passive partner."

"There is plenty of capital chasing this space, there's no doubt about it. It's kind of everywhere. And there's lots of different types of capital providers and partners that are operating in and around RIAs," Kawal said. "Now you're taking on a shared control, shared decision-making structure. So you really do have to look within your business and say, is my team ready for this? That's a big one. Are my clients ready for this, because it has changed for them? Those are two, obviously, really table-stakes questions. And then it's at a high level, are you ready? We're an industry formed by entrepreneurs, fiercely entrepreneurial people in this space. And with all of that comes sometimes a challenging question: are you ready to share that decision-making with somebody else? And is your management team ready for a different type of partner that is professionally running businesses and investing in businesses for a living? Are they ready for that type of change?"