When an independent financial advisor’s thoughts turn to the possibility of M&A activity or financing to assist in their exit from the business, where do they go? 

For the vast majority of RIA’s – those who see anywhere from a quarter of a million to $3M in gross revenue on an annual basis and represent 95% of the RIA industry – financing for an exit or M&A activity is all about internal financing or what is frequently referred to as a seller financing deal, said David Grau Sr., CEO and president of FP Transitions, a provider of consulting, valuation and succession plan services to independent financial advisors.

This means a sale of the firm, on a gradual basis, by the owner or key advisor, to one’s partners or employees with financing provided by the seller.  If executed with care, an ideal outcome would entail the systematic increase in the value of the business over time while retaining clients and expanding the client base. For larger firms, the process can often involve financing provided by the firm itself.   

In both instances, the development of a succession plan  – one that carefully hands off or transitions the business to one’s junior partner or employees – is a necessary element of the process and requires a cooperative effort between two or sometimes three generations of the business, to ensure a positive outcome for all participants – the buyer, seller, clients and associated broker-dealer.

“At this level – firms with $3M or less in revenue - - we’ve seen a steady if not a growing stream of insider-based, seller financing deals over the past three years,” Grau reports.  His firm, based in Portland Oregon and founded in 1998, consults on a nationwide basis with approximately 1,200 RIA firms a year, working with firms that see anywhere from a quarter of a million to $20M in revenue. 

He also expects to perform a total of 850 valuations this year, the largest number his firm has executed in the 12 years since it was founded, reflecting - in part - the growing awareness, Grau says, of the benefits of succession planning, a key aspect of the insider financing process, as well as the projected increase in M&A activity in this sector in 2010 and in the months ahead.

The growing awareness and uptick in insider financing activity, observers say, has been evolving over time and is due to a variety of reasons. 

According to David Devoe, managing director with Charles Schwab Advisor Services in San Francisco, there is a natural bias within the RIA industry to sell firms internally, given the tendency of many financial advisors to want to ensure continuity of service and to pass the business on to someone whose business skills, philosophy and quality of service is of a level they know and trust. 

“Often, they may have an internal candidate they would like to sell to, someone they know well and who knows the business well,” he said, who can then ensure that clients cultivated carefully over time will be taken care of, despite the exit of the founding partner.

Another reason for this trend has to do with the structure of independent financial planning firms.  According to Grau, very often, RIA firms have one key advisor who maintains most if not all client relationships in what is a strictly cash flow business or one with an intangible asset base and nothing physical akin to inventory or machinery that a bank or institutional lender might be able to easily put a lien on, thus making bank financing a less likely event.

But the real game-changer for RIA’s, says Gau, is the fact that for most principals of independent financial advisor firms, their ownership in the business now represents their single, largest and most valuable asset and is growing in value faster than any other assets, as many have seen the value of their 401K, stocks and bonds and equity in their house drop, on average, anywhere from 30 to 40%. 

Add to that the fact that Charles Schwab Advisor Services says that the average age of most RIA firm owners today is 54 or 55, with 30% of owners now over the age of 60, experts are predicting a methodical migration to retirement in the industry over the next 10 to 15 years. 

In light of these market and demographic shifts, consultant Grau says that his key message to owners hoping to be savvy about their retirement plans is, “Start thinking beyond compensation and about the value of the equity in your business and do it sooner than later;  Equity is a powerful tool that can help every advisor build a larger, more stable and valuable business.  It’s no longer just a pile of money, it’s the pile of money,” you will need to manage to ensure a comfortable retirement when the compensation element comes to an end.


Katherine Heires (www.mediakat.com) is a freelance business journalist and founder of MediaKat llc.    


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