By Wendy Leung
Gaining scale is more than a concept: There are real, tangible benefits that firms realize through M&A
It is undeniable that M&A in the RIA space is heating up and not only are the number of deals increasing but the size of the average deal is also rising. What is behind this trend? Why are independent business owners merging their firms into larger enterprises? The answer is that “scale matters” and real benefits can be derived from merging a smaller independent firm into an enterprise level independent organization. That is, one we define as a firm with $1B+ in AUM that is profitable, with a robust platform and infrastructure, real capacity and a strategy for growth and a solid succession plan.
5 Key Benefits of a Merger
The drivers behind the recent uptick in M&A for the independent space are the tangible benefits that firms realize as a result. Gaining scale translates into the ability to expand capabilities and create a more solid foundation for the future, making a strong advisory business even stronger and more prepared to compete in an evolved marketplace.
Lower costs: Access to most favored nation pricing for compliance, technology and custody allows a business owner to drive costs down and improve margins.
Enhanced infrastructure: Big firms offer a fully built-out support infrastructure that small firms simply cannot afford. Access to a dedicated CCO, CIO, HNW planners and a strong suite of operations and administrative staff allows a business owner to enhance client service and to disengage from the day-to-day minutia of running the firm. This translates into more time spent on client facing and new business building activities.
Broader Resources: Enterprise level independent firms typically have solved for the sophisticated needs of HNW and UHNW clients. The ability to shop across a range of banks for the best lending solutions, access to multiple alternatives platforms and the resources to handle complex trust capabilities are a few of the areas where smaller firms can benefit.
Succession: Many business owners struggle to identify a successor that is the right cultural fit and also has access to capital to buy the owner out at retirement. Merging into a large firm with deep pockets and the next generation in place solves for succession.
Growth: At the end of the day, all of the above advantages of a merger position business owners to achieve far greater growth than they could on their own.
Although there are clearly tangible benefits that can be attained with the right merger in order for a deal to close, flexibility will be required. Key sticking points often relate to how much autonomy the smaller firm will sacrifice to be part of a larger organization. A willingness to give up a brand, and in some cases adopt the investment strategy of an acquirer, may be part of the overall negotiation. At the end of the day, the benefits of a merger must outweigh the compromises, and a rising tide must lift all ships and translate into a win for all parties—buyer, seller and client!