Registered Rep.: What is driving the record pace of RIA mergers and acquisitions seen in the past few years?
David Devoe: The average advisor is 55 years old. About 30 percent are over 60 years old. So, you have folks who started in this business probably 20 years ago starting to reach retirement age. They can exit the business and shut down the firm — not very attractive for anyone, including the clients. They can sell to their junior partners, although, if they don't start early enough it's really a challenge for the junior folks to buy into the organization. Or, they can sell a minority, majority or even full-ownership stake to another RIA, holding company or another firm.
RR: How many deals have been done?
DD: The last two years we've seen record numbers. In 2006, we saw 58 deals; in 2005, we saw 51; and we saw 28 and 24 deals in 2004 and 2003, respectively. And, so far, we're on track to do potentially 60, maybe even 80, deals in 2007. The size of the firms that are selling has also increased over time.
RR: Why is that?
DD: It's partially driven by the economics of these firms. Once you get over $300 million in assets under management, that firm could be worth $5 million or more. And even if you'd like to sell it to your junior people in the organization, it almost becomes impossible. For someone to come up with even 10 percent of that, or half-a-million dollars, can be challenging for these folks.
Some of the holding companies will come in and buy 20 percent or more of the firm, but they'll also help the next generation buy 10 percent or more. They don't want the next generation jumping ship and going somewhere else.
The successful holding companies that exist today — Focus Financial Partners, Convergent Capital Management, Wealth Trust Advisors, Boston Private Wealth Management Group — all these firms celebrate the independence of the firms they acquire. And their intention is to go out and acquire good management teams that can run the business on their own. They want to spend their time going out and making more acquisitions, and maybe creating some value-added services that these other firms can't take advantage of on their own.
RR: What kind of practice is really desirable?
DD: Ultimately, firms that are managed well, that have an attractive — and growing — client base, and that have really thought through a lot of the fundamentals of the business are going to be the most attractive for an acquirer.
