There’s been a flurry of RIA acquisitions over the past year, and the trend shows little sign of slowing. Between 10 to 20 qualified buyers are lined up for every seller currently, according to industry estimates, and RIAs are willing partners. What’s behind the M&A frenzy?
From the seller’s perspective, consider the rapid shifts in the technology and regulatory landscape, Matt Straut, head of Oppenhimer Funds’ RIA group, told me at Schwab’s Impact conference in November.
“Twenty years ago, when I first started to work with RIAs, a large one was $100 million. It was a three- to four-person firm. It had an administrative assistant and a CRM and a phone. And that’s really all it needed,” Straut said. But now firms of all sizes require new tech tools to manage the increased complexity around tax optimization, rebalancing, asset selection and fees, he noted.
Those tools are expensive, Straut said. They must be must be purchased, maintained and leveraged. Then there are new regulations, which can be costly to implement. A deep-pocketed buyer can be an antidote.
“If I’m at a smaller firm with fixed costs at X that are going to 2X, and I don’t have increased revenues to offset that, I’ve got a decision to make,” Straut said. “Do I bring someone in at yet more costs, or do I merge?”
As for buyers, they’re attracted like “bees to nectar” to RIAs’ recurring revenue, Charles Paikert writes in this month’s main feature, “Buying Spree.” Deal volume in 2017 was on track to set a new record exceeding 150 transactions, according to the most recent data.
Going into 2018, “demand to buy is clearly still very strong,” Paikert tells me. Even if the stock market has a sustained dip from 2017’s record highs, overall volume may decline, but “good, big firms will remain in high demand and will command high prices,” Paikert says.
A recession or prolonged market correction could throw sand in the gears, Paikert says. “But buyers think it may work to their advantage because sellers will be more desperate to get what they can while they can,” he adds.
Still, cheap credit has underpinned the boom, Paikert cautions. A spike in interest rates could dampen enthusiasm. In the meantime, however, RIAs must slow down and do extra due diligence when working with suitors.
“Sellers usually are involved with just one sale — their own — while buyers usually make many transactions and are much more experienced in M&A,” Paikert cautions. “So sellers often leave money on the table because they don’t realize their true value to buyers.”