Financial advice Mergers and acquisitions on the rise | Financial advisers


The registered investment advisory industry is changing in many ways. Efficiency is on the rise, not only through technology, but also through mergers and acquisitions, known as mergers and acquisitions.

And the industry’s M&A activity is growing – for several reasons.

Small consulting firms with around $ 150 million or less in assets under management, or AUMs, often struggle to achieve profitability. Large fixed costs include compliance and technology, and the overall cost of doing business can be difficult for small businesses going it alone.

These are fairly common scenarios leading to a sale.

“We have seen an increase in the flow of transactions in recent years and we expect this to continue for the foreseeable future,” said James Fisher, director of mergers and acquisitions at FP Transitions, a consulting firm in Lake Oswego. , Oregon, for financial advisors.

Fisher attributes the increase in transactions to a few factors. With widespread consolidation in the industry, he says, buyers and sellers are seeing mergers and acquisitions as a growth path.

Typically, the seller would leave the business after a transition period. This is no longer the norm, says Fisher.

In 60 to 70 percent of the external transactions facilitated by FP Transitions, the seller continues to work for the buyer’s business for two to seven years, he says. This arrangement can provide the seller with a gradual path to retirement while alleviating the burden of compliance, back office management and technology. It also allows the seller to continue to grow their business.

Another big trend is the acquisition of talent. “Buyers see the value of acquiring not only the assets and the clients, but also the seller’s team of advisors and staff, most of whom already have a strong relationship with the acquired clients,” said Fisher. “This allows new owners to leverage institutional expertise and avoid the time and cost of training new professionals.”

The first RIAs for sale

Max Schatzow, an investment management and securities attorney at Stark & ​​Stark in Princeton, New Jersey, says many of the companies currently for sale are part of the first wave of independent RIAs. These were founded by owners who separated from brokers years ago, before the RIA movement was as big as it is today.

Schatzow says some of these companies never evolved much or created internal succession plans. “These are companies with one to three partners, all in their late 50s or early 60s, looking to move on,” he says.

Greg Sloan is a Certified Financial Planner and CEO of Go Beyond, an Atlanta-based software platform that helps advisors make hiring decisions and retain clients. In a previous role, Sloan helped facilitate advisory acquisitions.

Sloan says the M&A trend that was predicted years ago has finally arrived.

“Many of the founders of RIA are realizing that they don’t have the technical expertise or the venture capital to invest in next generation leaders and owners,” he says.

Naturally, sellers always hope to get the highest price. Sloan says valuations are high for small businesses, relative to profitability. “I’m not sure that’s the case for large companies,” he says.

Assessment methods may change

The consulting industry is still focused on sales at a multiple of revenue, rather than the more widely used formula of earnings before interest, taxes, debt and amortization known as EBITDA, Sloan says.

“We are still at the beginning of the era of consolidating the RIA space,” he said. “At one point, I see the EBITDA formula shrinking down to companies under management under management, but it could take a decade, depending on the speed of this era of consolidation.”

Schatzow says RIA ratings are higher than he remembers.

“There is a strong institutional demand for established companies, and they all seem to be turning to the same handful of salespeople,” he says.

He adds that the relatively low loan costs are also at the root of the transactions.

Leila Shaver, a securities lawyer and founder of My RIA Lawyer in Atlanta, says financial institutions buy RIAs as well. These include banks and insurance companies, which increased the median size of acquisitions in 2020.

“We are also seeing boomer-age advisers retiring and moving on, so sales of small to mid-size RIAs have exploded,” she adds.

Take the time to compare

FP Transitions performs several of these benchmarking studies for its clients. “We can help you design and implement a plan to achieve stated goals, such as growth, internal succession, or external succession,” says Fisher.

“The key piece of advice is, know where you are, know what you want, and be strategic and realistic about getting there using the right advice and the right tools,” says Fisher.

Shaver says the RIA industry is only at the beginning of a ramp-up phase.

“The RIA space is incredibly entrepreneurial, providing an opportunity to create multiple streams of income and business lines to sell to the retail investor,” she says. “An advisor can wear multiple hats and sell brokerage, advisory and insurance products to a client under one roof.

As the number of transactions increases, Shaver expects more regulatory scrutiny, particularly with respect to various standards and terms of advisor compensation. All of this is already confusing for consumers, and business-to-business transactions can further blur the lines.

Shaver says, “Until then, it’s opening season.”

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