Edelman Financial Services, one of the advisory industry's largest RIAs with over $17 billion in assets, is plunging into the crowded, competitive and capital-intensive M&A game.
"We've decided to engage in M&A activity," says executive chairman Ric Edelman. "At our board meeting last week, we decided to do this for the first time ever."
Backed by majority shareholder Hellman & Friedman, the private equity firm that has long been a major LPL Financial shareholder, Edelman Financial hopes to establish a national brand and become "America's planning firm," says Edelman, whose syndicated radio show, seminars and books drive the RIA's brand.
The company's board of directors concluded it was impossible to accomplish that goal with inorganic growth, according to Edelman.
The RIA's CFO, Rene Chaze, will lead Edelman's M&A and strategic alliance efforts, which will include several new hires. "We need more players on the field," Chaze says. "We're ramping up our capability and are going to be moving quickly in the [acquisitions] space."
STRATEGY: GO DEEP, NOT WIDE
While Edelman didn't say how many advisory firms his firm hopes to acquire this year, he did say the RIA is targeting an additional $2 billion in assets in 2017.
Quote"We're ramping up our capability and are going to be moving quickly in the [acquisitions] space." - Edelman Financial CFO Rene Chaze.
Edelman currently has 43 offices in 16 states, but the firm plans to grow by "going deeper" instead of wider, according to Edelman, and it intends to open more offices in existing markets instead of moving into new cities.
"We're going to add advisers in existing markets instead of building out," Edelman explains. "It's faster and cheaper and preserves a huge growth opportunity. We're having trouble keeping up with current demand in cities like New York and San Francisco."
To be sure, Edelman is entering an extremely aggressive and active M&A market.
Deep-pocketed investors and aggregators such as AMG Wealth Partners, Focus Financial Partners, United Capital and HighTower Advisers are already scouring the country for potential RIA sellers. Also in the hunt are a number of fast-growing RIAs including Savant, Mercer Advisors, Mariner Wealth Advisors, Wealth Enhancement Group, Aspiriant and Beacon Pointe.
"Edelman's value proposition will resonate with a certain segment of the market," says David DeVoe an M&A expert and managing partner of San Francisco-based consulting firm DeVoe & Co. "The established brand, scale and infrastructure will be attractive to firms seeking to compete more effectively in an increasingly competitive market.”
Quote"We're going to add advisers in existing markets instead of building out," says Ric Edelman.
But Edelman, like other potential buyers, also faces "a key challenge, the inertia of a potential seller," according to DeVoe. "These are business owners who generally enjoy what they are doing and are making a good living. There isn't pressure to do a transaction."
What's more, the intense — and plentiful — competition means "there are lots of flavors of ice cream, so it will be important to see some interesting differentiation for Edelman's acquisition model," says investment banker Liz Nesvold, managing partner of New York-based Silver Lane Advisors.
EASY TO 'LOSE DISCIPLINE'
Edelman also risks overpaying for deals, says Corey Kupfer, managing principal of Kupfer & Associates, a New York-based law firm with a specialty in RIA transactions.
The company may have an advantage over other buyers because it is well-capitalized by Hellman & Freidman and "can act quickly to take advantage of a good deal and offer more cash than some other buyers," Kupfer says.
QuoteEdelman will consider "transformative" deals targeting firms with $5 billion or more in assets, says CFO Rene Chaze.
But, he cautions: "In competitive M&A markets when PE firms are pushing for growth, it is easy for a firm like Edelman to lose deal discipline."
Edelman says any RIA his eponymous firm buys has to be compatible with Edelman Financial's focus on financial education, which includes over 600 financial seminars in addition to Edelman's own radio show and numerous books, including his most recent, "The Truth About Your Future."
Edelman will look at market comparables such as AUM, multiple of earnings and multiple of discounted cash flow when valuing firms, Chaze says. A wide range of firms will be evaluated, he adds, from "incremental" purchases of RIA with as little as $100 million in AUM to "transformative" deals targeting firms with $5 billion or more in assets.
"That's where it gets really exciting," Chaze says.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access