MIAMI BEACH, Fla. - Investment capital has become easily available for RIAs, but that doesn't mean advisory firm owners are home free.
"The industry is awash with capital," said Rich Gill, co-founder of Wealth Partners Capital Group, a newly-formed RIA aggregator, speaking at MarketCounsel's annual conference for advisors. "Finding the appropriate partner and structure can be challenging, but the money is certainly there."
Industry executives noted that private equity firms, private investors, family offices, banks, aggregators, banks and even sovereign funds are investing capital in RIAs. So how can advisors best tap these newly-available resources?
· Determine what kind of capital you want to use.
Advisors who borrow money using credit can take advantage of low interest rates, but also "assume a certain level of risk," Gill pointed out.
Capital coming from equity investors needs to be closely scrutinized, he added.
· Know what motivates providers.
Lenders have a return expectation of 5% to 10%, while equity investors are looking for a mid-teen to 20% return on their investment, said Shirl Penney, chief executive of Dynasty Financial Partners, the New York-based platform provider.
Private equity firms typically have a short-term investing time horizon and some RIA buyers may want distribution access to cross-sell other products, Penney added.
· Recognize why you want the capital.
Advisors typically need capital to provide liquidity for shareholders, to invest in the business, make acquisitions or fund a succession plan.
"Advisors have to look in the mirror," said Gill. "Determining where you are in your career and what you want to do can make a big difference in what kind of deal you want to make. If you feel you have five good years left, that's going to mean a different decision than if you feel you're just hitting your stride."
· Know what capital providers value.
"Assets are an incredibly poor proxy for the value of the business," Gill told advisors. "As a buyer, we're only looking at revenue, free cash flow, profit and loss and balance sheet strength."
Marty Bicknell, chief executive of Leawood, Kansas-based Mariner Wealth Advisors, which has over $10 billion in AUM and plans to accelerate its inorganic growth in 2018, said an advisor's "only value proposition is client engagement. The only thing that matters is working closely with your clients, keeping them and gaining more."
Advisors shouldn't be seduced by asset growth as a result of the bull market, Bicknell stressed. "Growth has to be uncorrelated to the market," he said. "You want to add net new revenue."
Quote"Assets are an incredibly poor proxy for the value of the business." – Rich Gill, co-founder of Wealth Partners Capital Group.
· Plan ahead.
Start preparing early, fix things that need fixing and re-invest.
"Advisors need to re-invest in the firm, especially if they're hitting a plateau where they can go to the next level," Gill said. "Invest in advisors, operational staff, professional managers and technology. It's hard to do but best for the business."
The more cash principals re-invest, the more valuable the business becomes, John Furey, principal and founder of Phoenix-based Advisor Growth Strategies, told advisors.
"Run the business like you don’t need other people's money," added Penney. "The best time to raise capital is when you don't have to."
· Consider hiring an investment banker.
Investment bankers aren't cheap, but they will significantly reduce your workload, said HighTower Advisors CEO Elliot Weissbluth.
"Investment bankers are like air traffic controllers," Weissbluth said. "They remove distractions and manage the process and timeline."
· Don't be afraid to walk away.
Sometimes a deal just isn't meant to be.
"The best deals I ever made," said Peter Raimondi, who engineered five transactions in seven years as head of Banyan Partners, "were the ones I didn't make."