NEWPORT BEACH, Calif. – It was a no-holds barred debate, taking on the biggest issues in RIA M&A. Could the deal market get slammed by a market downturn? How much longer can the breakaway broker phenomenon last?
These and other hot-button deal topics, including the merits of deals for boutique firms versus bigger advisories, took center stage at the annual Deals & Deal Makers conference.
Assigned to argue opposing points of view for each topic — which was then subject to a vote from the audience — were Dan Seivert, CEO of Echelon Partners, the host of the of the conference and Mark Tibergien, chief executive officer of Pershing Advisor Solutions.
Taking on concerns that a possible stock market reversal could hurt M&A valuations, Tibergien argued that fears have been overstated. "There are fewer advisors and the amount of money coming is tremendous. It will remain a very attractive business and wealth managers will be in the cat bird's seat for a long time."
Quote“The amount of money coming is tremendous. It will remain a very attractive business.”
Secular trends are different from market cycles, Seivert retorted, warning that the current bull market cycle is very long in the tooth.
Buyers anticipating a down market should be especially careful how they structure M&A deals and not over-value companies, Seivert went on. Sellers should get deals signed pronto, Seivert added, and avoid deals with provisions where prices can be adjusted based on future events.
"After a downturn, it may be five to seven years before valuations return to current levels," Seivert warned.
Reflecting the panelists’ split, the Deal Makers audience was evenly divided on whether a bear market would hurt the M&A market.
THE REDUNDANCY RISK
The audience was unequivocal, however, when it came to the merits of boutiques, defined as firms with less than $1 billion in AUM, versus larger firms. Bigger is better, the vote came in.
Quote"Redundancy is an issue at smaller firms," says Pershing's Mark Tibergien.
The winning argument was straightforward: bigger firms are more professionally managed and profitable, can leverage scale and are more attractive to buyers.
"Redundancy is an issue at smaller firms," Tibergien pointed out. "If a key executive leaves, there's a problem."
As for the breakaway phenomenon, despite being shown data from Echelon that breakaway activity in the second quarter of the year slowed, audience members overwhelmingly believed wirehouse brokers would continue to bolt to RIAs.
The case for a continued breakaway slowdown, according to Seivert, centered on the argument that the lure of independence was over-rated. The supposed benefits of becoming an RIA, including transition assistance, available technology, retention packages, payouts and liquidity events were also being viewed more skeptically by brokers, he added.
Older brokers are less likely to migrate, but wirehouse advisers in their 30s and 40s are definitely interested in leaving, Tibergien said. "The volume of inquiries we're receiving from them has increased by an order of magnitude," he said.