MIAMI BEACH, FLA. – RIA business strategies are aiming too high to sustain this fast-growing segment of the industry, according to leading experts.

RIA growth is "not being realized," Pershing Advisor Solutions' Mark Tibergien said at the MarketCounsel Summit.

Mark Tibergien, chief executive officer of Pershing Advisor Solutions. Image: Bloomberg
Growing inorganically through internal expansion of clients and revenue, perhaps adding prized local advisers and small teams, should be the "preferred path" for RIA growth, says Pershing Adviser Solutions' Mark Tibergien. (Bloomberg News)

The biggest inhibitor to growth is lack of capacity, he explained. Too many advisers are "over diversified" with offices in "multiple geographies" that are difficult to manage efficiently, he said.

Advisers should be striving to create capacity and concentrate their resources by building an enduring firm, a theme Tibergien explores in his new book, "The Enduring Advisory Firm," co-authored with Kimberly Dellarocca.

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"If I were to die today, would [the seller] put my family's interest before his own?" - Ron Carson.

M&A PROS AND CONS

Growing inorganically through internal expansion of clients and revenue, perhaps adding prized local advisers and small teams, should be the "preferred path" for RIA growth, Tibergien said.

Growth by mergers and acquisitions might be fashionable and tempting, he said, but in reality are often "distracting" and difficult to "execute and integrate" efficiently.

Nonetheless, industry consolidation is inevitable as professionally managed firms become bigger, according to Tibergien. National RIA firms may emerge, he said, but a more likely scenario is the rise of super regional advisory firms, analogous to what the accounting profession calls Group B firms.

Slideshow
RIA M&A: Heading for a record year?
“Q3 2016 is the eighth successive quarter of 30 or more transactions,” says David DeVoe, managing partner at DeVoe & Co.

These firms will have a branch manager system not unlike the brokerage industry, Tibergien predicts, with a "geographic concentration that provides for tighter management, tighter branding and operational leverage."

TO-DO LIST

Marty Bicknell, chief executive of Mariner Wealth Advisors, and Ron Carson, CEO of Carson Wealth Management Group, are two of the industry's most successful M&A practitioners and in separate panels, they laid out a check-list for aspiring acquirers.

Before going forward with any deal, Carson said he asks himself a fundamental question: "If I were to die today, would this person [the seller] put my family's interest before his own?"

Another deal breaker for Carson when considering firms to bring on: "Is there enough commonality of best practices" that, if the firms merge, will result in the ability to deliver the same client experience?

Carson also looks for advisory businesses that stand out from the crowd and can give clients an "out-of-the-box experience." He said being unique matters.

WHAT MARINER WANTS

Firms that want to be "partners in growth who aren't looking for an exit strategy" and emphasize "wealth advice over investment advice" are high on Bicknell's list as potential acquisition targets.

Mariner focuses on "top-line growth first," Bicknell told Summit attendees.

He agreed with co-panelist Roy Burns, managing director of the Boston-based private equity firm TA Associates, who said that firms are more valuable when organic growth is not reliant on the relationships of one person.

"At the end of the day," Burns said, "we assess the entire team and their capability to grow."

A firm's retention rates for both clients and advisers were also critical benchmarks for Mariner, Bicknell said.

GETTING IN THE GAME

Mariner bases its valuation on a multiple of EBITDA, he added. "I want to know what my cash-on-cash return will be day one," he said.

Few potential deals pass Mariner's muster. Bicknell said he sees an average of 200 firms a year but has only made seven acquisitions in the last three years.

"M&A takes a lot of work and effort," he said.

When asked what owners who were interested in buying or selling a firm should do, Bicknell answered: "Go to events like this, meet people and listen."

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Charles Paikert

Charles Paikert

Charles Paikert is a senior editor at Financial Planning. Follow him on Twitter at @paikert.