Pershing’s Tibergien warns RIAs not to rely on M&A for growth
Death. Bankruptcy. Depleted oil wells.
Those were the cheery words used by Mark Tibergien, CEO of Pershing Advisor Solutions, as he described what’s happening to many wealth management firms in a presentation at the DeVoe & Company M&A Summit in New York City.
“Most companies go bankrupt in their growth cycle. Think about that for a minute,” Tibergien said, adding later: “I don’t mean to make this sound dour or depressing, because growth is ultimately good,” but advisors have to be conscious of the risks.
Tibergien was skeptical at the number of deals happening in the industry: Just because a firm is opening up or buying new offices doesn’t mean it is profitable. “We don’t know if they are acquiring a depleted oil well or a growth spot,” he said.
To be sure, M&A deals continue to proliferate. In April alone, there were 12 wealth management transactions, totaling $36.4 billion, according to a Fidelity transaction report. The number of RIA transactions year-to-date is up by 24% compared to last year, according to the April report.
“You may be proud of what’s happening year-over-year, but how much of that is coming from new business and new flows versus how much of it is coming from the market?”
Nonetheless, there are firms that will fail, despite markets going up and demand for financial planning services, according to Tibergien. “The seeds of destruction grow in the good times,” he says.
It’s not enough for RIAs to open offices, join new markets, add talent and acquire practices. Firms need to pay close attention to their own mathematics.
Net margin should be growing along with revenue. It should be 25 to 30% after fair personal compensation, he says. If this isn’t the case, those expansion decisions may not actually be profitable.
Expenses can be high. Tibergien said there is demand for advisors, meaning that new hires cost more.
Advisors may be relying on market growth more than they should. “You may be proud of what’s happening year-over-year,” Tibergien said. “But how much of that is coming from new business and new flows versus how much of it is coming from the market?”
Buyers should also be conscious of the demographics and perpetuity of a business, whether there is a succession plan in place.
Cultural integration will be the biggest risk of M&A, according to Tibergien: People don’t always get along, and processes aren’t always the same.
Other factors to look at when considering a merger or acquisition include: Is there a difference in the type of people you hire, the tech you use, reporting processes you develop, the way you brand yourself and communicate, the way you attract clients?
Businesses are unique, and buyers need to be selective to acquire practices they can properly manage or engage, especially when it is a multi-location practice.
“My definition of culture is: What do your people do when you’re not looking?” Tibergien said.
After a deal is done, there should be due diligence and evaluation of how it went. What does the business look like three years? How many people are still left after the deal? What are challenges people experienced in the process? What did you learn if you had to do it again?
In short, M&A isn’t always the answer.
“M&A by itself is not bad, but there are consequences that come with a pure M&A strategy as a method of growth,” Tibergien says. In some cases, using that money to build a market or a brand can be more useful.
“Growth for the sake of growth is evil,” Tibergien cautioned. "Growth for the context of the strategy is good.”