MIAMI BEACH, Fla. - Hoping to grow your advisory firm to the next level with an eye to selling or merging? Or maybe you're on other side of the table, looking to expand through an acquisition.
Some of the industry's leading executives offered tips and advice to RIA principals during the annual MarketCounsel Summit, which attracted an elite gathering of power players in the independent planning channel.
- M&A shouldn't be a part-time activity for the CEO.
If an advisory firm is thinking about selling or buying, the founder or CEO shouldn't just set it aside for "Friday afternoons from 3 to 5," said Bob Oros, an executive vice president at Fidelity Investments. "It has to be a full-time job. He or she has to think about it every day."
- An acquisition should be strategic, not random.
Acquiring a firm far from your geographical footprint or with a very different business model just because it's available "doesn't make sense," said Mark Tibergien, CEO of Pershing Advisor Solutions.
"You have to ask if it's a strategic decision," Tibergien explained. "The addition of assets is not necessarily helpful." If the clients are mostly older, he went on, "it's like buying depleted oil wells -- the assets have diminishing value."
- Beware the 'Valley of Death.'
It's hard work to get to $500 million in assets under management. But many advisory firms face an even tougher challenge once they reach that threshold, said Liz Nesvold, managing partner at Silver Lane Advisors, one of the industry's leading investment banking firms specializing in RIA M&A.
Nesvold calls the gap between $500 million and $1 billion the "Valley of Death." Firms tend to take exhale once they hit the half-million mark, but that's a mistake, she said. "That's when you need to reinvest in the business and hire for their next evolution," Nesvold told advisors. "Growth is really important."
- Think beyond valuation.
Of course the term sheet is important, but both buyers and sellers should ensure any deal meets strategic objectives, said Robert Thornton, president of First Republic Private Wealth Management. "The principals have to go beyond valuation and fully understand what each side wants from the deal," Thornton said.
Read More: Valuing an RIA: Which Factors Matter Most
- Culture really is important.
Get to know the other firm really, really well. "Dating is fun, but you have to think beyond the honeymoon and about how you're going to relate as partners," Nesvold said.
She went on to tell a story about a deal she worked on that was nearly complete -- until one of the RIAs realized that everyone at the other firm wore a tie -- which no one in his firm did. The deal did not get done.
- Don't be too aggressive.
The numbers may work and the may culture fit, but upon final review of the term sheet, the seller makes a new request – and imperils the deal.
Thornton said he's seen it happen with disastrous consequences. "If you have a deal that works, don't be too aggressive," he told advisors. "Take a step back and work with a third party to get back on track."
One firm that didn't take that advice paid nearly, he recounted, because the buyer they pushed back on was offering the best price. "Rule No. 1 if you're a seller is don't give up leverage if you know the buyer is the best buyer," Thornton said. If the seller causes the best buyer to walk away because of minor but aggravating demands, "leverage turns quickly regarding what kind of terms you get [with the next buyer.]"
- Don’t give in to fear.
Concerned about the markets? Afraid the bull has run its course and that valuations for RIAs have peaked?
Marty Bicknell, CEO of Mariner Wealth Advisors, which has over $10 billion in AUM, disagrees. "I don't see a top in valuations, and I don't think prices will fall in 2016," Bicknell says. However, "I do see a huge valuations gap between firms that are growing and those that are not."
Brent Brodeski, CEO of Savant Capital Management agreed. "M&A opportunities are bigger now than I thought six months ago,” he said.