An RIA’s Second Wind: Solving for Scale, Support and Succession

“Marty” was the sole owner of his $300mm hybrid RIA for the past 24 years. With a staff of 5 and annual revenue of approximately $2.3mm, he was content with his lifestyle practice…Until just after he celebrated his 60^th birthday, when he began to feel some angst about succession plans (or lack thereof), his legacy, the value of what he built, and his endgame. With almost 40 years in the wealth management business, he began to take a good hard look at where he was and where he was going. The realization that he no longer liked putting toner in the copy machine, dealing with human resource issues or negotiating leases – combined with a desire to retire in the next 5-10 years – made him reach out to us.

“Should I attempt to recruit my successor?”
“Should I hire a Chief Operations Officer to take over much of the non-client facing responsibility?”
“Should I merge with a larger RIA?”

These were the questions swirling in Marty’s mind—ones that we would reconcile together as we began a thorough due diligence process.

Some background on Marty’s practice

Marty was the sole rainmaker and advisor on his staff which also included 2 strong assistants, an analyst and an operations manager. His business was approximately 90% fee-based, custodying the majority of client assets with Schwab. He managed all money in-house, using money managers and mutual funds, and he relied on an independent broker dealer to provide compliance oversight and process the occasional trades his clients requested. Historically, Marty’s firm had grown approximately 10-15% per year, but in the recent past, growth had declined as the death of older clients has created some attrition and he lacked the bandwidth to prospect for new business. While he ran a relatively lean practice, his staff and admin expenses were quite high and so EBITDA was less than $600,000. Marty had always hoped that the analyst on his staff would grow into the role of heir apparent but, truth be told, he just wasn’t mature, sophisticated or entrepreneurial enough.

Indecision Time

Many agree that M&A deals will saturate the headlines with a changing regulatory environment and the rising cost of doing business. Marty became leery about steering his ship in less-than-friendly waters. He had long been loath to give up any control or ownership, but it was becoming increasingly apparent that the pressure was mounting and it was time to consider other options. The alternatives were likely to come in the form of the sale of his firm because he knew it would be difficult to recruit his successor given the fierce competition for top talent. He had been approached many times over the years by investors in the wealth management space like Focus Financial Partners and United Capital Partners, and by larger RIAs looking to gain scale, but he consistently dismissed them all, placing greater value on his autonomy than anything they could offer him.

The Questions

Yet, knowing a change was imminent, Marty started to dig deep for the answers to the questions that dogged his decision-making process:

“If I sell my firm, how much autonomy will I lose?”

“Just how much control am I willing to give up?”

“Will I be able to offload the minutia of running the business and get back to doing what I love—serving clients?”

“What will happen to my staff?”

“Will my clients still be served the way they are used to?”

“What of my legacy?”

“Will my business grow faster post-acquisition?”

“Will the potential benefits of a sale outweigh the downside?”

With the waterfall of possibilities greatly expanded since Marty last surveyed the industry landscape, he was overwhelmed by the thought of even beginning to identify an ideal acquirer. Marty and our firm had a good relationship for years and so he reached out, asking us to help him identify his list of “must haves” in a deal, his long-term goals, and to curate the right list of firms to explore.

The Process

In a perfect world, Marty wanted to work another 5-7 years, maintain his independence, take some chips off the table, gain equity in a larger enterprise, and accelerate growth by offloading the middle and back office work. To satisfy all curiosity, we agreed that the following suitors would be appropriate to explore:

3 standalone RIAs: All with similar culture, investment philosophy and client service models; the first with $1B under management (local to him), the second with $3B under management (located 4 hours away), and the third, a national firm with almost $5B under management. Would an acquisition by one of these firms enable Marty to move the needle significantly in terms of growth, and would a percentage of these firms’ equity ultimately be worth more than 100% equity in his own firm?

HighTower Advisors: HighTower is a multi-custodial national RIA and BD where 25% of the firm is owned by its partner advisors. We classify HighTower’s partnership model as a quasi-independent one because it offers all the autonomy, freedom, flexibility and control of a 1099 situation, but allows the principal to free himself of the minutia that often bogs him down. An advisor maintains his own P&L but leverages the firm’s ADV, compliance, operations, legal, human resource, technology and overall infrastructure. Would this model allow Marty control over his destiny? Would HighTower be able to identify a successor for him? Would he really grow faster if he didn’t have to attend to the non-revenue generating aspects of running the business?

Focus Financial Partners: Focus is the largest investor in the independent space. As such, their model would acquire approximately 50% of Marty’s free cash flow in return for equity in Focus and one of their extant partner firms. Could it be appealing to have a capital and strategic partner? Would he be OK with giving up his brand identity and adapting another? Was there enough excess cash flow to sell and still be able to maintain a similar lifestyle? Would this model mean he would lose himself and his value proposition completely?

In the end

After almost a year of many meetings with multiple firms, lots of back and forth in the decision-making process, and likely many sleepless nights, Marty decided to join HighTower Advisors. By doing so, he would become a W-2 advisor partner of the firm, gaining:

• Name brand recognition: HighTower’s brand equity is far greater than Marty’s small firm.
• Best-in-class access: HighTower’s scale enables open architecture access with favored nation pricing to most any service, product or technology.
• The ability to offload the minutia: With a turnkey offering and focus exclusively on client-centered activities.
• A succession plan: HighTower’s 50+ advisor teams mean that Marty would have a choice of successors when the time comes.

And, best of all, HighTower applied an aggressive multiple to Marty’s EBITDA, offering him a combination of cash and equity. While Marty would be giving up a modicum of control, he became increasingly comfortable with the benefits of doing so: More time to spend with his family and on the golf course, peace of mind and a community of like-minded entrepreneurs to share ideas with.

The Lesson

With the prospect of retirement looming, Marty started to question whether where and how he was conducting business was right for his own future, as well as that of his clients. Opening his mind to the exploration process opened doors to possibilities he hadn’t even dreamed of—and helped him to recognize what he really wanted out of this leg of his business-life journey. Due diligence helps to not only answer questions; done right, the process is one that helps you recognize what questions you really should be asking, so that the answers help guide you to the right solution.

One of the biggest revelations that Marty – and other independent business owners like him – have found in this process is that the industry landscape has changed greatly. Options exist now that did not in years past, leaving far greater potential to achieve your business goals than you may well be aware of. Not all flavors of independence are the same; getting to know the new landscape will help you better define the path to achieve your goals and give your career a second wind.

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