It remains a red hot market for mergers and acquisitions among RIA firms, as deal activity continues at a record pace quarter after quarter. And while it may be tempting for principals of advisory firms to jump in, deal experts warn against advisors trying to go it alone when buying or selling firms.
Carolyn Armitage, head of Thrivent Advisor Network and a former managing director at ECHELON Partners, said too many successful advisors assume their expertise in building a firm translates over into the M&A world.
“It really doesn’t,” she said, during an industry roundtable with RIA executives. “For the advisors that try to DIY this themselves, whether it’s buying a firm and trying to compete against all the big consolidators in the industry or they’re trying to sell their firm, they’re really at a disadvantage to these larger firms that have dedicated and experienced teams.”
Those larger firms are also often backed by private equity firms, another advantage in their favor.
“This is what private equity firms are born to do, which is really to take advantage of this asymmetric information that’s out there in the marketplace,” Armitage said. “So that small advisor trying to do it themselves—the deck is really stacked against them.”
Ron Carson, founder and CEO of Carson Group, said he was one of those advisors.
“I thought I was a decent financial planner/advisor, so I can do M&A,” Carson said. “So the first deal I did was a complete disaster because I did it on my own. We didn’t really have an M&A department. Fortunately it wasn’t a huge deal, but I learned that I needed to bring in that expertise.”
Now his firm has seven people on staff dedicated to M&A.
“There’s this little known illness called ‘deal fever,’ that if caught, will force you to make poor decisions that you will pay for forever,” said Bob Oros, CEO of Hightower Advisors.
Oros said his firm maintains a strict discipline around the deals they do, looking primarily at three factors: the RIA’s leadership team; organizational fit; and consistent "same-store sales growth" at the targeted firm. They don’t focus on size or geography.
“Everybody thinks they’re growing,” he said. “But when you really pare it back, I’m here to tell you the majority of the industry doesn’t grow on a true same store sales basis,” he said.
Armitage said most advisors will just focus on the dollar amount of the deal, and not the way the deal is structured or the terms. For instance, many get excited about a multiple of EBITDA without realizing how those profits are calculated, or that there may be strings attached in the details of the deal structure that prevent them from getting the full multiple that was promised.
Yet the terms of these deals are the easy part, she said.
“The more challenging aspect for most retiring advisors, or an advisor who is trying to compete for the first few times in buying a firm, is that emotional roller coaster,” she said.
The average advisor is not prepared for retirement emotionally—what it means for them, their families, their career and their legacy, she said.
“It’s a really big deal, oftentimes much more than the dollars and terms," she said. "It just comes out in the form of trying to, perhaps, get more deal than perhaps what they are entitled to.”
Each of the panelists said they’re seeing a huge increase in M&A activity, driven primarily by the COVID-19 pandemic. But they expect that trend to accelerate even in a bear market. Carson pointed out that there are more advisors over the age of 80 than under the age of 30.
“I think people are becoming aware that you’re either going to be the disruptor or the disrupted; there’s really not a great middle ground,” Carson said. “You’re going to have to get to scale, you’re going to have to be able to deliver alpha.”
“There’s a group that we call ‘rich and tired,’" he said. "They’ve been in the business a long time, and they just don’t have the energy to do what it takes, and I think it’s a wise choice for them to sell."
Jim Dickson, CEO of Sanctuary Wealth, said the pace of deals, already high, will only increase.
“If you look at the amount of advisors over 60 that have sort of hung on during this bull market, they’re sort of waiting for the moment, and it feels like to me and in our conversations that that moment is happening," Dickson said. "That moment is really as the business gets harder and as technology continues to grow, we’re at the point of saying, ‘It’s time to hand the keys over,’ and then it becomes how prepared are they?”
“If you’re already a little bit on the edge of, ‘I’m not sure I want to be in or out; I’m not sure I have the energy or not,’ then all of a sudden you’re having uncomfortable meetings with clients, you’re like, ‘Heck, I’m going to exit.’ So I believe the bear market will cause much more activity in the M&A space,” Carson said.
