Harnessing RIA M&A Strategies for Growth

With the RIA industry setting itself up for further consolidation based on the macro trends impacting the industry, the opportunity for peer-to-peer M&A activity is increasing dramatically . Multiple industry studies (see 2017 industry reports: ECHELON Partners , DeVoe and Co. , Cerulli Associates , Fidelity Investments , Charles Schwab , and TD Ameritrade Institutional ) are anticipating record levels of deal making in 2018, with volumes expected to increase dramatically in the years to come. The macro trends of aging advisors, increased competition from new technology players, pricing pressures and increasing client demands are putting stress on smaller advisors’ business models. So much so, that many industry experts suggest that firms under $200 - $300 million in AUM may not be sustainable over the long run and will need to seek out a larger partner. Scale is becoming critical for RIAs to be able to continue to invest in their businesses, so they can build out centralized infrastructure, deploy the latest operational technology systems, hire professional management and embrace a digital client service experience to match the most successful firms.

As a result, many larger and more established RIAs are now actively pursuing inorganic growth strategies to take advantage of this industry consolidation movement. However, being a successful buyer is not a simple matter. In fact, if done incorrectly, “buying badly” has the potential to derail firms from their stated missions, distract them from their current business of serving existing clients, as well as unnecessarily increase financial and compliance risks that are often unknown until after the deal has closed. Therefore, an inorganic growth strategy should not be embarked upon blindly. It should be a thoughtful process after firms have shored up their own technology systems, infrastructure, workflows, and service models so they have both the management and operational capacity to efficiently integrate acquired or merged clients and employees.

To provide a solution to this growing industry issue, we are pleased to continue our research into the best practices of inorganic growth by profiling the best in class approaches of the industry’s largest and most successful firms in this second edition of our groundbreaking series on how to become a professional buyer (For first edition, click here ).

We would like to thank Aspiriant, Beacon Pointe Wealth Advisors, EP Wealth Advisors, Mercer Advisors and Parallel Advisors for sharing their stories, ideas and approaches so that the entire industry can benefit from their experience and wisdom.

Related: Ready to Take Your Firm to the Next Level? Here's How

Industry Trends

In the first installment of our “Becoming a Professional Buyer” research, we highlighted some industry trends that are driving consolidation within the RIA space, most notably the aging of the advisor population. According to industry researcher Cerulli Associates , the average age of advisor-owners is nearing 60, and there are currently more advisors over the age of 80 than under 30.

These baby boomer RIAs are typically lacking a viable succession plan, leaving the future of their firms in doubt. Combined with their desire to retire and a more brutally competitive marketplace, the opportunity to merge these firms into a larger organization is becoming the rule these days, rather than the exception from just a few short years ago.

Also creating urgency for firms is the continued evolution of the RIA industry from a sleepy corner of the larger financial services sector to a high-focus area for both incumbents as well as outside technology disruptors to raise the overall industry-wide competitive response. As a result, the stakes for RIAs are getting higher. This heightened competitive environment is leading to troubling trends such as pricing pressures and slowing growth. According to the latest research from the 2017 Fidelity Benchmarking Study , “60% of advisors are regularly discounting their fees by 20-30 basis points to attract and retain clients.” Additionally, per the same study, organic growth for firms has been steadily declining to 3% from 6% just two years ago.

This margin compression and slowing growth are symptoms of a larger problem for a majority of the industry: lack of operational leverage, scale, and a systematic growth engine.

The current, decade-long bull market has been artificially propping up many firms whose overall profitability and sustainability will be challenged when the markets eventually cycle into an extended down market. Particularly in today’s more challenging and competitive marketplace, these RIAs will be hard pressed to go it alone for much longer, creating yet another tremendous opportunity for better resourced firms to step in and provide a transition solution for these advisors, their employees and their clients. The entrance of private equity investors is also pushing this tipping point in the industry. These sophisticated buyers are flush with cash and are arming some of the mega-RIAs with capital to continue the consolidation trend.

So, how are larger RIAs closing so many deals? We have found RIAs that have a successful M&A track record tend to showcase their capitalization, centralized infrastructure, family office services, tax expertise, professional management and investment solutions that ultimately will enhance the selling firm’s client experience. Additionally, they stress that transitioning advisors don’t necessarily have to retire and exit their firms just because they have been acquired. Our research with leading RIAs shows that these selling advisors are able to free themselves from day-to-day business issues and resume focus on better serving and growing their client base. In fact, they often report that they are rejuvenated, energized and see a clear path to becoming highly productive again in servicing their client base within their new firm after being acquired.

Related: Should You Jump into the M&A Game?

Polishing the Pitch

For RIAs who are seriously interested in pursuing inorganic growth, our research with top firms active in the merger and acquisition game reveals some very direct next steps that need to be implemented before jumping into the M&A arena.

Many industry consultants, investment bankers and financiers suggest that there should be even more deals executed based on the industry demographics and trends, however there is much improvement needed in the buyer community. Simply put, there are a lot of ill-equipped buyers out there.

Accordingly, acquiring firms need to have a powerful benefit message that is easily understandable and appeals to the selling advisors’ long-term future and business continuity aspirations. This message needs to be substantially different from the pitch advisors make to clients and prospective clients.

To be successful, an acquiring RIA’s pitch needs to focus on the reasons advisors got into the business in the first place: to serve clients and ensure they are taken care of in a way that they had always envisioned. As part of that personalized approach, selling advisors often didn’t foresee the operational responsibilities and back office management that they would inherit from running their own business – something that larger, better-resourced RIAs can quickly and easily absorb, freeing up the advisors to better cater to their clients.

Acquiring RIAs need to have a proven client service model, efficient operations infrastructure, and access to additional planning and investing resources so that the selling advisor’s clients will have a better experience than they are currently provided. After all, this is their life’s work and if they are going to hand over their clients’ faith and trust to a new firm, that acquiring RIA needs to be able to demonstrate these capabilities and communicate them appropriately. Additionally, being able to showcase the ability to market for them via custodial referral programs, systematized marketing approaches and other growth strategies inherent in the firm go a long way to demonstrating why they, their staff, and their clients will be better off as part of a larger organization.

Thus, before heading down this path, it is critical that potential RIA buyers have an efficient infrastructure, professional management, best in class technologies, institutionalized client service models and an airtight compliance process. A good next step is to engage industry operations and technology consultants to perform a “pre-M&A diagnostic” to highlight areas that need improvement and actions to take to be on par with, or differentiate from, the other sophisticated professional buyers out there.

To read our full report, which identifies 7 key capabilities buyers need to posses prior to engaging in deal making, along with profiles of 5 leading RIA acquirers representing $37 billion of client AUM, please click here .