Anatomy of an RIA Acquistion
1
Speakers
• Derek Bruton, EVP, National Sales Manager,
IAS, LPL Financial Corporation
• Jeff Rosenthal, SVP & CMO, Triad Advisors, Inc.
• Moderator: Philip Palaveev, President, Fusion
Advisor Network
2
Why RIAs?
•
Fastest growing part of the financial services industry
– ~ 15,000
15 000 firms,
firms ~9
9,000
000 SEC registered firms
– Over $2 billion in AUM
•
Has absorbed many of the best BD firms
– 25% - 30% of our current firms have their own RIA
– Over 50% of RIAs once had a broker-dealer but left it
•
Potential to expand our traditional value proposition
– Provide scale and centralized resources
– Hub of value added services
•
Our advisors have a keen interest in growing through acquisitions
–
–
Our largest firms aggressively seek to grow
Our largest firms will consider switching channels or BDs if they could help them
acquire
3
Does it matter that they are RIAs?
•
Does not matter
– Similar profile of the
advisors\principals
– Common background – they
were
ere once with
ith BDs
– Common culture in many
aspects
– Similar business practices
•
It makes a big difference
– RIAs are culturally “allergic” to
BDs
– Steep resistance from the
c stodians
custodians
– Introduces the RIA to FINRA
rules adding complexity and
risk
– Tangle of economics may
frustrate them – platform fees,
haircuts, different contracts,
etc.
4
Why Not RIAs?
•
They position, present and think of themselves as the “opposite
of the BD culture”
–
–
–
•
•
In merger conversations they often end up recruiting BD firms
away rather than joining them
RIAs have attracted a lot of interest and perhaps too much
–
–
•
Fiduciary relationship
Anti-commission
Suspicious of haircuts and platform fees
Over-valued
Unreasonable expectations
Custodians
–
–
–
Compete with BDs and are very protective of their firms
Provide many of the same services that are our value proposition
Protect their economics and make it difficult for BDs to price their services
5
Two Distinct Markets
•
Large Institutional Firms – Over $500 million in AUM
–
–
–
–
–
•
Small “Practices” – Under $100 million in AUM
–
–
–
–
–
•
Multiple
p owners and depth
p of talent
Employee advisors – non-owner, salary compensated, significant role in client
relationships
Standardized delivery, sophistication, well developed back office
Powerful local brand
In high demand, premium pricing and multiple buyers vying for the deal
One owner of two to three silo practices
Small team dependent on the owners
Emphasis on personal relationship with clients
Needs operation support
Economics do not afford a standard deal, deals happen between advisors
The gray area - $100 to $500 million in AUM
–
Has elements of both and can change depending on how aggressive buyers get
6
Who Is Buying?
• Before and after – aggressive
gg
buyers
y
p
pre-crisis and
fewer buyers today
– Consolidators – struggle with profitability and payments due. Have
stopped
pp acquiring
q
g and have even unwound many
y deals. Uncertain
participation in the market in the future
– Banks – used to be the largest buyer. Balance sheet issues do not allow
for acquisitions. May resume activity when healthy
– CPA firms – all of the large firms have established their “main”
subsidiaries but they continue tuck-in mergers
– Other advisory firms – continue to be very active in the merger market.
There are many ongoing merger negotiations at every size level
7
Broker-Dealer as Acquirers
•
Sanders Morris acquired Edelman Financial
– Edelman became the main retail advisory platform
•
First Allied and Advanced Equities
– Advanced equities serves as an investment platform for reps of First Allied
•
Hightower Advisors
– Not an acquisition model but has some similarities to a merger model
•
NFP and NFP Securities
– Parent company owns several of the largest RIAs
•
Northwestern Mutual and Frank Russell
– Potential for distribution through rep network
8
Advisors as Acquirers
•
Advisors are looking to grow
– Intrigued
g
by
y the ability
y to buy
y AUM on an earn-out
– Unwilling to commit a down payment
– Struggle with negotiations
•
Selective acquisitions have generated great results
– High retention of clients and assets
– Relatively smooth transition of service
•
Good knowledge
o edge o
of tthe
e buye
buyer is
s key
ey
– Problems arise when the acquired book of business proves to be different
than expectations
•
Circumstances when it works
– Retiring advisors
– CPA practices selling off their advisory business
9
Larger Firms as Acquirers
•
The largest BD firms have aggressive growth goals and are
looking to merge smaller RIAs
– Looking to create internal management capabilities
– Merging RIAs as partners in the existing firm
– Often have an RIA of their own
•
Sometimes this becomes a trigger-point for the BD firm to
abandon their affiliation
10
Who is Selling?
1.
2.
3.
4.
5.
Large firms who see a merger as
a way to grow faster
f
and obtain
new capabilities
Large firms who are looking to
deal with owner succession and
new owner introductions
Small firms who are facing
succession
Small firms who are getting out of
the business
Small firms who are getting
scared
•
Example - $500,000 in fees
– Take-home per owner is
around $300,000
– Valuation is around $1 million
– 5 payments of $200,000
$
+interest
•
Why sell?
Wh
ll?
– Only if advisor does not want
to work any-more
11
Valuations and Terms
•
•
•
•
Ultimately valuations focus on cash flow of the acquired firm – present value of
the transferable cash flow stream
T
Transactions
ti
have
h
been
b
b
between
t
5 – 7 X EBOC ((earnings
i
b
before
f
owner
compensation)
The 2 X Revenue rule of thumb has been popular (range of values from 1.8 to
2.2 has been used by FPTransitions)
Terms are key
–
–
–
Down payment versus contingent payments
Types of consideration – stock, loans, etc.
Tax treatment of the payments
•
Advisors need help with the transactions – several firms specialize in this
market
•
Valuations seem to have held but payments are heavily skewed to contingent
forms of consideration
12
How Can You Help Advisors?
•
•
Education and information
A ki th
Asking
the ttough
h questions
ti
– Why?
– Does this support your strategy?
– Is this a good fit?
•
Providing professional advice and transaction support
–
–
•
Internal experts
Agreements with external consultants
Financing?
–
–
Many broker-dealer do it on a situational basis
Risky and unclear how the return will be realized for the BD
13
What The Future May Hold?
•
Significant consolidation in the RIA market
– Owners are uneasy about the future – the crisis scared many
– Desire to belong to a larger and more stable entity
• Consolidation models will be less aggressive and will
change their models
– Will emphasize the synergy rather than the financial wizardry
• Advisors will lead the market as acquirers and merger
partners
• We will see some of the larger RIAs compete as “feeonly” broker-dealers
14
Case Study #1 – Textbook transaction
Seller ‐ John W.
ƒAge
Age 56
56
ƒ$357,000 revenue
ƒ$57mm AUM
ƒFirst‐time Seller
Buyer – Andrew D.
ƒAge
Age 48
48
ƒ$1.2mm revenue
ƒ$111mm AUM
ƒFirst‐time Buyer
ƒ29 inquiries and three offers in 30 days
29 i
ii
d h
ff i 30 d
ƒEngaged B/D and counsel early and often
ƒBest fit vs. best offer
g
ƒClient retention nearing 96%
15
Case Study #2 – Textbook Opportunity, Poor Execution
Seller – Thomas D.
Buyer – Steve F.
ƒAge 66
ƒ$90mm AUM
$90
AUM
ƒPassive investment philosophy
ƒIntimidated by growth
yg
ƒAge 55
ƒ$125mm AUM
$125
AUM
ƒPassive investment philosophy
ƒMotivated by growth
yg
ƒLooked good on paper
ƒPast experiences were aligned; future plans never laid out
ƒSellers lack of focus on clients killed the deal
ƒClient retention = less than 10%
ƒClient retention = less than 10%
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Case Study #3 – Incorrect Expectations
Seller – Walt Y.
ƒAge 81
ƒ$200mm AUM
$200
AUM
ƒUses TAMPs, fixed income
ƒPerpetual seller
p
Buyer – Dan H.
ƒAge 48
ƒ$375mm AUM
$375
AUM
ƒMutual funds, separate accounts
ƒOpportunist
pp
ƒBuyer willing to be flexible, but not unrealistic
ƒProduct mix differences were an obstacle
ƒSuccession planning was focused on price, not business
ƒ3 trips to the altar but no marriage
ƒ3 trips to the altar but no marriage
17
Case Study #4 – Opposites Attract
Seller – Vincent C.
ƒAge 58
ƒ$450mm AUM
$450
AUM
ƒSkilled portfolio manager
ƒFee plus commissions
ƒRiding into sunset
g
Buyer – Janice W.
ƒAge 47
ƒ$720mm AUM
$720
AUM
ƒSkilled salesperson
ƒFee only
ƒCareer peaking
p
g
ƒGood “marriage” of strengths
ƒSeller coaches, retains then retires
ƒFlexible business model is attractive
ƒ>95% retention plus 15% increase in new business
18
Case Study #5 – Dating before Marriage
Seller – Cathy J.
ƒAge 45
ƒ$275,000 revenue
$275 000
ƒ$51mm AUM
ƒWants to grow, but capital is scarce
p
Buyer – Joseph D.
ƒAge 55
ƒ$1.1mm revenue
$1 1
ƒ$90mm AUM
ƒLooking for a successor
ƒSole practitioner finds continuity partner
ƒ50% stake sold over 4 years
ƒSynergies achieved lead to larger, more profitable practice
ƒSuccession plan in place
ƒSuccession plan in place
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Trends
• 2008 – 2009 True RIA’s moving back to
commissions – Self Preservation
• 2008 – 2009 True RIA’s moving back to BD’s
– tired of regulatory demands
• 2010 and Beyond – Regulatory Landscape –
Who Knows?
20
RIA to RIA activity
•
•
•
•
•
Small to Mid size acquisitions
Individual and Partner controlled RIAs
$15 M - $100 M AUM
Hybrid Model
Retirement and Business Enhancement
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Tools Provided
•
•
•
•
Internal Matchmaker
Education
g
assistance
Due Diligence
Valuation Guidance – it is not always about “The
Number”
• Risk Mitigation
g
• Funding?
22
What an Advisor Needs to Consider
As a Buyer
As a Seller
•
•
•
•
•
•
•
•
•
•
Type of Practice – Culture
Client Base
Geographical Limits
What can I afford
Should the present owner remain
involved – for how long
Do I want to keep the staff
Technical expertise coming with
purchased firm
Is myy pricing
p
g consistent with the
other firms
•
•
•
•
•
Why am I selling
What does my ideal buyer look
like
Time Frame for exit
Have I placed a realistic value on
my practice
What are my deal killers
Do I need cash or can I accept
financing for the deal
What are my alternatives (Partial
S l IInternal
Sale,
t
l Sale)
S l )
23
Compliance Concerns
1.
2.
3.
4.
Record Retention Periods
Standard of Care
Privacy
Licensing
24
Compliance Considerations
•
Record Retention Periods – differ between BDs and RIAs
–
–
•
BDs are required to keep the following records for the stated periods: Six year: records of original
entry (blotters), customer account records, financial records, and cash records; Three years: order
tickets, guarantees and power of attorney, communications, net capital computations and related
records, written agreements, advertising records, bills, and training, supervision and continuing
education files; and Permanent: corporate records and fingerprint cards.
RIA are required
RIAs
i d tto kkeep th
the ffollowing
ll i records
d ffor th
the stated
t t d period:
i d Five
Fi years: records
d off original
i i l
entry (journals), customer account records, financial records, communications, net capital
computations and related records, bills, written agreements, advertising, and powers of attorney; and
Three years: corporate records.
Privacy – Regulation S-P
–
–
Both BDs and RIAs are held to the same standard with respect to most privacy issues.
Noteworthy, is the fact that RIA contracts generally cannot be assigned to another IAR. However,
transfer of securities accounts, especially those of RRs of Independent BDs, have become very
complicated and burdensome due to Regulation S-P.
25
Succession Planning
• Starting Point – get emergency plan in place to
enhance value of business at its sale
• Acquisition planning
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Sample Checklists and Other Tools
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