Many agree that 2016 will be the year where M&A deals saturate the headlines. With increased compliance looming, and the cost of doing business rising, any RIA that has been leery about steering their ship in less-than-friendly waters through the coming year may be looking for alternate routes.
There certainly is no shortage of buyers for high quality fee-only or hybrid RIA firms. Typically, those buyers are investors in the space (like Focus Financial Partners, Affiliated Managers Group [AMG] or United Capital Partners); larger RIAs looking to gain scale and increase capacity, bench strength and overall enterprise value; or private equity firms that want in on the action in the wealth management world.
There is, however, one category of acquirer that is often overlooked, but definitely gaining traction: large brokerage firms and banks. They have become a viable alternative for RIAs who are looking to take some chips off the table and get back into the fold of a larger organization with all of the advantages of scale and support.
Consider First Republic Bank’s acquisition of super successful RIAs Constellation Wealth Management this past July, and Luminous Capital several years prior. On Wall Street magazine reported in May 2015 that 24 independents, managing an aggregate $2B in assets in the previous 12 months, went back to being employees. And, these were just some of a growing number of independents and brokerage acquirers that will see value on both sides of the table.
So, what’s in it for the RIA Seller?
Name brand: While standalone RIAs have the benefit of open architecture access to robust capabilities, what they almost all lack is the cache of a name brand. When serving the high net worth set, it’s hard to compete with iconic names like Morgan Stanley and Merrill Lynch, for example.
Best in class access: RIAs presumably have the ability to access any and all products and services, but unless those RIAs have the bandwidth to fully vet every option and the scale to meet stated minimums, oftentimes they are left lacking. Big firms offer easy access to an uber-robust solution set relative to investment management, lending, trust, insurance, private banking and the like.
Offload the minutia: Most principals of RIA firms complain about having to manage the aspects of their businesses that just don’t spark them—like operations, admin, human resources, compliance, real estate, etc. And, with greater regulatory pressure bearing down, the ability to leverage a turnkey offering and focus exclusively on client-centered activities can be utopia to some business owners.
Succession plan: With large numbers of advisors working for these banks and brokerages, the likelihood of finding your next-gen successor is very high. Plus, almost every large firm has a “sunset” program in place, which allows advisors to monetize in a meaningful way when it comes time to retire.
Ability to move once and monetize twice: Brokerage firms and banks are offering enormous transition packages, and the most aggressive ones are being offered to RIAs looking to join them as employees. These deals can exceed 3X revenue (structured as a 9-year forgivable loan) and also offer the “business owner turned employee advisor” the ability to take advantage of the firm’s “sunset” program when appropriate. This could easily net the advisor 5-6X revenue at the end of the day.
Why do brokerages and banks want to acquire RIAs?
Shortage of talent: With consolidation in the financial services industry – especially in the traditional space – firms are motivated to recruit from a pool of top advisors who are driven by things other than the biggest up-front check.
Expand entrepreneurial mindset: RIA principals tend to have the entrepreneurial spirit that wirehouses seek in their advisor talent.
Increase assets under management: Most RIAs manage high quality, highly portable, fee-based businesses bound by the fiduciary standard. With the changing regulatory environment, moving advisors to a fiduciary mindset is the goal of all big firms.
Expand product offerings: The opportunity to introduce a new client base to a swath of banking products and services can be a bonanza for these mega firms. (Oftentimes, clients of RIAs go elsewhere for their credit, cash management and lending needs.)
While most principals of RIA firms prize their independence and control, some tire of dealing with the minutia that goes along with business ownership. After years of having to be captain of the ship, many get to a point where they are only too glad to go back to focusing solely on being a client advisor. There is destined to be a spate of M&A activity this year, and any option that allows independent firm owners to get back to doing more of what they love will be a hot ticket. And, big banks and brokerages will get more swings at the ball and the opportunity to attract more of the high-quality talent they are looking for.