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The volume of dealmaking in the wealth management industry is grossly understated, Dan Seivert, CEO and founder of ECHELON Partners, told advisors earlier this week at Pershing Advisor Solution’s regional conference. His firm estimates between 3,000 and 9,000 people are breaking away and joining other firms, compared to the 700 to 800 breakaway deals reported in the media. Everyone thinks that breaking away is just a wirehouse phenomenon, but it's happening in all the different channels. “RIAs are going to be increasingly experiencing their own breakaway phenomenon,” Seivert says.
Target Achieved
A lot of advisors have hit personal wealth targets, in terms of the enterprise value of their company, Seivert says. They’ve gotten what they wanted out of the business and now they’re looking to capitalize on that.
Tired of Working
I think a lot of the advisors we talk to are tired or burnt out, whether it’s because they’ve gotten older, or they just have a business operation that’s just too tiring to run and they haven’t sufficiently delegated, Seivert says.
Too Big to Manage
Others have grown and turned into a larger organization and they just have a lot of people and responsibilities. There are a lot of advisors who don’t like managing and they don’t like to spend time on it, Seivert says. “They’re frustrated with the fact that they’ve grown their firm to a position that requires a lot more management.”
No Successor
Some firms don’t have suitable internal successors, so they’re looking to make a deal as a solution. About 75 percent of advisors don’t have true succession plans, according to Pershing’s Mark Tibergien. But Seviert added that of the 25 percent that do, those plans generally aren’t very good. “It’s going to be harder to attract human capital, so the firms who are better at gaining, training and retaining talent are going to have a competitive advantage,” he says, adding that operating without a succession plan typically means millions of dollars less in enterprise value.
No Interest in Succession Plan
For some advisors, it’s not worth their time to work out a succession plan. In many cases, succession planning is so difficult for advisors to successfully pull off because many people don't understand the work necessary and do not want to invest the time and money to do it properly, Seivert says.
Blowing Up
Many firms seek out deals because they want to take advantage of higher valuations from strong growth. “When we go to value firms, growth is the single most important variable in terms of the value of a firm—it’s that you have it, it’s where you generate it and it’s how much of it you have,” Seivert says.
Compelling Deal
Some advisors have received compelling offers from unsolicited suitors to merge. “Those firms often come to us and ask—‘this firm doesn’t know us, they took us to lunch and said we’re worth $5 million; we had no idea, but because they have no idea who we are, we must be worth at least twice that right?’” Sievert said to a room full of chuckles (The short answer: no).
Too Good to Pass Up
In some cases, deals come about because advisors have found an offer too good to pass up. Today’s buyers are a combination of family offices, roll-up firms and RIAs. Although Seivert says their research shows that while there’s a lot of media hype around roll-up firms and aggregators, they make up less than 5 percent of deals done.
Believe a Downturn in the Markets is Around the Corner
The belief that a downturn in the markets is around the corner is another motivator for advisors looking to sell. And they’re not alone. People have already started a countdown to the crash of 2016. Former Morgan Stanley investment banker and behavioral economics columnist Paul Farrell is predicting not just a minor correction, but a 50 percent crash.
Competition
For some advisors, it’s all about being hit uncomfortably by the competition. Instead of continuing to struggle independently, some advisors seek to gain scale with their operations by merging with other firm. Seivert says it’s likely there are 700 to 750 firms in the RIA channel with more than $1 billion in assets now.
