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Mergers and Acquisitions - An artistic process within a financial transaction
by Alex ROSENBERG, EDITOR, CITYWIRE RIA
The seller’s perspective
The buyer’s perspective
The matchmaker’s perspective
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With bullish buyers backed by private equity money and skittish sellers looking for a way to retire or cash out, it’s no surprise that the number of M&A transactions in the RIA space has hit a record high every year for seven straight years to 2019. And while deal volume has slipped recently amid the Covid-19 pandemic, many believe it will only be a temporary slowdown, given the large and growing numbers of committed buyers and sellers. In this Citywire RIA special report, we walk readers through every step of the process – starting with the decision to sell, then considering the decision to buy, moving on to the matchmaking process, getting a look inside the negotiation room, and ending with the integration process. In each of the five pieces, we learn about a different part of the transaction journey and get a chance to see the entire M&A landscape through the eyes of different sets of experienced professionals. By talking to the most important players in the M&A landscape and hearing the stories of those who have made it through the process, we hope to give you a better understanding of how deals actually get done.
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Ian Wenik For a financial advisor, selling your business is both an end and a beginning. It is the end of your life as an independent firm. You no longer call your own shots. Your name might not hang over the door. But on the bright side, selling might mean you no longer have to file your own Form ADV with the Securities and Exchange Commission or pour over profit and loss statements. You might have the opportunity to spend more time mentoring advisors and serving clients. If it’s done right – and with the right attitude – selling your practice could be the beginning of a powerful new partnership. Perhaps it’s for yourself, or for your successors if you plan on using the transaction as a way to gracefully retire. The following pages contain the stories of three advisors who chose to make the leap and sell their businesses to larger entities. The next generation Huber Financial Advisors, based in Lincolnshire, Illinois, is a family affair. For roughly 32 years, founder Dave Huber has sat atop the $1.6bn firm. For the past 12 years, his son, Phil, has worked alongside him, first as a portfolio manager and most recently as chief investment officer. Dave Huber had planned to pass the firm down to its own employees when the time came, but quickly found that such a transaction was easier said than done. ‘I’m 63. I’ll be 64 in September and I saw that it was going to be difficult to do an internal succession from a financial standpoint. My goal became: “How do I do good for me but also prioritize doing what’s best for our clients long-term and also our employees, including my son,”’ he said. ‘Over the last five years, I talked to a number of different firms.’ About 18 months ago, Huber began talking to Brent Brodeski, chief executive of local rival firm Savant Capital Management, which manages about $6.75bn and is based roughly an hour’s drive west, in Rockford. The two recognized their firms had a lot in common – and Brodeski was receptive to Huber’s desire to take some chips off the table and take care of his employees.‘ I always admired Savant from a distance,’ Huber recalled. ‘I knew at our size, around $1.6bn, we were getting to the point where we would need to continue to build out our infrastructure and it was going to require a lot of capital and time. My runway was getting shorter and I believe we probably picked up five years of time we wouldn’t have to spend on doing that because Savant already had it.’ Once at the negotiation table, Huber and Brodeski hammered out a transaction structure that would be almost totally comprised of equity. All six of Huber’s employee owners agreed to roll their Huber Financial equity into Savant equity, and several more Huber employees agreed to buy Savant stock. ‘I’m sure I could’ve sold out to somebody – a PE firm or somebody – for maybe a little more money in a different deal structure. A lot of them are doing almost all-cash now,’ Huber said. ‘But I really wanted to keep skin in the game.’ The deal also came with a promise: none of Huber’s 28 employees would be heading out the door. ‘I did have a concern that maybe there might be some duplication,’ Huber said. ‘We got contract guarantees for every one of our employees, which was a big consideration. We were adamant about nobody being left behind. They were very accommodating about that and very excited we felt that way.’ In the few months since the transaction closed in February, Huber Financial is thriving as part of Savant. Phil Huber has become CIO of Savant, while Dave Huber now has more time to work with clients thanks to his new advisory role on Savant’s board. Huber Financial staffers are also beginning to advance within the Savant organization: Huber Financial chief compliance officer Maggie Baer was recently appointed to the same role at Savant. That kind of transition is worth a few dollars on a headline price. ‘I have a home for the next 10 or 12 years that I’m going to be comfortable with,’ Dave Huber said. The great escape For Springside Partners’ Carina Diamond, selling her practice served as a path to a more efficient ownership structure. Springside Partners, a $300m firm based in Akron, Ohio, had a thorny issue: The business was profitable but it had a complex ownership structure. Its majority owners were a team of certified public accountants (CPAs) at Diamond’s former employer, accounting firm SS&G. BDO purchased SS&G in 2014 but left its wealth management operations behind. Springside had taken its first, halting step out of the old structure in 2018 when it sold the brokerage side of the operation to Cetera-affiliated Prosperity Advisors, allowing Diamond to focus more on fee-based business. But Diamond knew she needed to go further. ‘I still had a majority of shares owned by a group of the CPAs who were no longer affiliated with me, so they did not position me long-term for success,’ Diamond said. ‘I was heavily pursued for many years by a lot of firms, I think partly because we were a strong firm, but we also had the differentiator of being female-run and a desirable Midwestern geography.’ Diamond likes to joke that her firm received a lot of ‘flowers and candy.’ She estimates that she talked to between 40 and 50 entities about a potential acquisition over a five-year period, but very few conversations went past the ‘first or second date.’ She ultimately found the right suitor in Dakota Wealth Management, a fledgling Palm Beach Gardens, Florida-based RIA helmed by veteran dealmaker Peter Raimondi, the founder of both Banyan Partners and Colony Group. Diamond saw Raimondi speak at a conference about M&A and for the first time felt she had found someone authentic in the fast-talking world of dealmaking. ‘We didn’t really even talk about investment strategy, operations or even financials until much later in our relationship, I think because to both of us, it was so abundantly clear that everything other than culture was secondary,’ Diamond said. When it came time to hammer out deal terms, Diamond was more than happy to sit down at the negotiating table without an investment banker, though she did have legal counsel at her side. ‘The simple truth was that the financials, the valuation, the other metrics really prepared themselves because we were so congruent in our thinking,’ Diamond said. A linchpin of their deal structure was Raimondi’s plan to buy out Diamond’s accountant backers. The deal was constructed as a mixture of cash and equity, with all of Diamond’s employees getting the chance to buy equity in Dakota Wealth Management. ‘I’m talking to Carina about her future and the future of her employees, but the 70% ownership was going to not participate because they were essentially going to be gone,’ Raimondi said. ‘Price, value and fairness were going to be very important to them, and also, in an admirable way, Carina’s future was very important to them. They thought about this transaction in a way that was good for her… it was like she had a mentor in the process.’ These days, Diamond serves as a managing partner at Dakota, which used the 2019 transaction to surpass $1bn in client assets in little more than a year of existence. She looks back at the transaction structure with fondness. ‘I think it made [the transition] a lot easier. It was just a lot cleaner, so I could be focusing more on the future,’ Diamond said.
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The chance to grow Hugh Phillips’s eponymous firm had maxed out its growth potential. Napa, California-based Hugh B. Phillips Retirement Group (HBP) managed about $235m in assets as it sat on Securities America’s brokerage platform, but had more than its fair share of endemic issues. ‘I had systemic things within my own practice that could obviously be better with a large organization,’ Phillips said. ‘Things like payroll and dealing with employees. I also had a younger advisor who was starting to get into his 40s and wanted to do his own thing and that was becoming a complication. How do we do business continuity planning?
The answer came in the form of an old friend: Scott Hanson, the co-chief executive of Parthenon Capital-backed RIA acquirer Allworth Financial, which is based roughly an hour northeast in Sacramento. Phillips briefly served as Hanson’s supervisor at Lincoln National early in his career and was part of a joint marketing agreement with Hanson’s firm when it was still known as Hanson McClain, before it received private equity backing. It was Hanson who initiated talks of a takeover, Phillips said. Phillips had no immediate intentions of selling his business, but he had longstanding ties to Hanson and his business partner, Pat McClain. He ultimately decided to go for it. ‘It was a leap of faith,’ Phillips said. ‘These guys, I’ve known them a long time. Everything they touch seems to work out and they always have the best intention and character. It took me a while. It wasn’t an overnight decision. But the more I talked with them and the more we built on our relationship, the more clear it became.’ Roughly 16 months out from his transaction’s close in February 2019, Phillips has had a chance to reevaluate his priorities and discover some of the limitations he had while operating independently that he didn’t even recognize at the time. Before selling to Allworth, he had a staff of two advisors and one office manager. ‘It’s just hard to find that great employee to be asked to do a lot of tasks. We were pretty small in size and once you get to $250m to $300m, it’s just going to be constrained by capacity, right? There’s only so much you can do,’ Phillips said. ‘We had great value as a practice, but how do I grow that? I’m about the same age as my partners. We’re in our mid to early 50s, and what do I do over the next 10 years?’ Negotiations were painless, relatively speaking. ‘I’m sure I thought I sold it too cheap and I’m sure they thought they paid too much,’ Phillips joked. ‘It worked out to be a perfect negotiation.’ Phillips now plies his trade inside an $8bn firm that works with a host of different sectors. Thanks in part to Allworth’s name recognition and his preexisting relationship with Hanson and McClain through the joint marketing agreement, the overwhelming majority of his clients followed him over to Allworth. It’s been an adjustment going from calling all the shots to being a cog in the wheel at a large organization for the first time in 30 years, Phillips admitted. But he is adamant that the move was best for his clients in the end.‘ [As an independent practice] you’re dealing with worker’s comp, you’re dealing with overheads, you’re dealing with compliance, you’re dealing with the broker-dealer,’ Phillips said. ‘So how much of that can you do and still have a great client experience? You have to put your ego aside and say: “Hey, the clients are not getting the experience once you get to a certain size.’
Republic Capital Group – securities offered through Chalice Capital Partners, LLC
John Langston, Republic Capital Group’s Founder and Managing Director, on the art of managing the fight-or-flight response in the M&A world for RIAs
What is the science and art of mergers and acquisitions (M&A)? Conceptually, the science of the math, legal, and accounting processes are important, but the reality is that there is an art to M&A. One of the science pieces that I like to focus on is the fight-or-flight stress response in humans. M&A is very stressful and, even though people are sincere in their belief that they want to pursue M&A, often they encounter this response with colleagues or a target they’re pursuing. They may not know how to recognize and manage it. When I talk about science and art, what we’re really working to do for clients is manage those together. We think that’s how transactions actually occur. If it were only science, it would be fairly simple to do the calculations, but the art is managing the factual and scientific principles through the lens of human emotions and using creativity to solve complex problems to make a transaction possible. Can you give some examples of how to address the fight-or-flight response in the M&A process? For example, if we have a process involving four partners, each partner will react to the process in different ways. Some of them may fight; the word ‘fight’ may be too aggressive, but there will be within the partners’ discussions, some natural resistance because of the stress. They may be resisting different things that the other partners think are good ideas. It’s important for people to recognize that they may be having a stress response, or their partner might be a little combative and not necessarily engage and respond in a cooperative way because of the stressful situation. Intervening with a client to help them stop and take a breath may sound simplistic, but when it’s happening quickly in real time, it’s important to operate this way. We can also see a flight response when a client begins to engage with a firm they’re seeking to acquire. Things will be going well, but then the other firm will start to become less responsive. This needs to be managed strategically with the knowledge that there may be a flight response at play. What we focus on is: how do we reduce the stress for different stakeholders? Is there some uncertainty or conflict we can solve in a creative way? For example, maybe they feel uncertain about the particular legal structure. We have a client that is a looking to merge with a target firm with a different tax structure. The target isn’t certain of the legal parameters around the merger. The best thing we can do to reduce that stress response for the target is to bring them legal information and work with their counsel to get that point clarified. Ambiguity always increases stress and increases the fight-or-flight response. Once we have removed that concern and brought clarity, they can be more relaxed about moving forward in the process. It’s vital to avoid the logic trap that the large issues are where all of the effort should be expended as some seemingly smaller things can be a large emotional hurdle. We are constantly evaluating things to identify the next issue and manage through it. If we bring all this to the current climate, where you will imagine there will be even more stress and uncertainty, how are you going to help companies after Covid-19? By announcing two transactions in March during a lot of uncertainty, we have proven that we can execute in this environment. In fact, things have actually calmed down, and we’re getting some more stability. Firms may have uncertainty around their revenue but must understand that M&A is a blend between a scientific and an artistic process. In the wealth management and asset management world, it’s a little clearer than other industries because you have fees on assets under management as opposed to future sales. The typical standard for valuing a firm for a transaction is the last 12 months of earnings before interest, tax, depreciation and amortization, so we know that most of the trailing 12 months are still very positive for those firms. It is best to evaluate options now as opposed to 12 months from now where we have no clarity and no insight. Our focus is always on bringing clarity and actual market feedback to the table. We don’t like conjecture, speculation, or prognostication. If a client says, ‘I think I may want to take in some capital’, let’s go to the marketplace to get actual written indications of where your value is so that we can have clarity. Gaining clarity brings the stress down and allows for decisions driven by reality. Perhaps a company goes out to the market and is unhappy with the value that the market offers, but at least they have clarity and actual, verifiable data. Of the two transactions we have just announced, one was a sell-side engagement where we raised investment capital for our client, and the other transaction was a buy-side engagement where we helped our client buy another wealth management firm. In each case, we had to look at the factors on each side and ask: ‘What are the risks?’ In the case of the investor, our client performed tremendously through the market downturn, which gave the investor confidence that they should move forward. In the case of the acquisition we helped consummate, we were able to adjust some of the financial terms to be longer-term so that our client had more time for markets to recover and stabilize. Above all else, reducing stress is bringing factual clarity and giving people actual, tangible options in order to make the best decision they can while avoiding conjecture and speculation, which may be too optimistic or too pessimistic. How do you view M&A in the wealth and asset management industry in the short term? As it relates to M&A, we will see a slowdown, mostly related to people’s inability to connect at a personal level. The RIA industry is a relationship-driven industry, and this is part of the reason why people should retain professional investment bankers. We understand the relationship side, but we also understand that certain things need to happen for a transaction to occur. A lot of transactions that were being discussed over the past couple of years will come back around. For example, we have a large client who has had six firms come back to re-engage discussions. These firms had a written offer in hand, which is the key to action. They had in their hands something tangible that they could look at and say, ‘I’m going to accept this offer’ or perhaps make slight modifications, but they would have been frozen without clear options. Connecting back to the science and art, if I’m going to have a fight, flight, or a positive action response, I need to know what I’m dealing with. The long-term demographics of independent wealth management firms are continuing to take market share. I would argue that this has made financial planning even more important. More and more people are realizing that the world is an uncertain place and need to make sure that both their investments and planning are in good shape. The demand for thoughtful, holistic wealth management is only going to increase.
John Langston Founder and Managing Director, Republic Capital Group
Jake Martin It’s widely agreed among the most active RIA buyers that there are trillions of dollars in assets up for grabs in the space over the next five to 10 years. A recent Cerulli Associates report pegged the total opportunity for mergers and acquisitions over the next decade at $2.4tn in assets, due to impending advisor retirements and, to a lesser degree, breakaway advisors and growth-challenged RIAs. Yet while the most active buyers of RIAs can be unabashedly bullish, the history of M&A in the RIA space is full of fishing stories and cautionary tales. Dave Barton, vice chairman and M&A leader at Mercer Advisors, who has masterminded the $16bn roll-up’s 31 acquisitions over the past four years, said it’s not like the fish are jumping into the boat. However, he did mention that his Denver-based firm has no fewer than five additional deals to announce in the coming months. A 30-year attorney with CEO chops, Barton said it’s still hard for him to wrap his head around all the moving parts of a typical M&A deal. ‘There’s a common misperception out there that people will do any deal because they’re so hungry and anxious to do deals, but M&A is extremely hard,’ he said. ‘It involves complex legal issues and complex tax issues. You’re merging companies, so there are lots of logistical issues, business issues, marketing issues, sales issues – the list goes on.’ Mercer’s foray into growth by acquisition began in earnest in 2016, after the company won backing in 2015 from private equity firm Genstar Capital. Barton said that from 2012 onward, Mercer had been doing ‘exceptionally well’ in terms of organic growth, adding up to 900 new clients and $1bn-plus in assets each year. ‘The growth lever we had not pulled was M&A,’ he said. ‘We saw that as an important strategic decision, too, as we saw the industry consolidating.’ Having started Mercer’s M&A business as something of a ‘night job’ while he was still at the firm’s helm, Barton has created numerous codified ways to avoid making the same mistake twice or otherwise make sure his bases are covered. Barton’s first rule of M&A club? ‘Don’t fall in love with the deal.’ ‘When you see the warning signs, heed the warning signs,’ he said. ‘If something is gnawing at you, go after it and find out what the problem is and what the etiology of that problem is. Don’t ignore problems. Don’t ignore gaps in information.’ In this regard, Barton said he speaks from experience and that it caused him to put a written protocol in place. ‘We call it a roadmap,’ he said. ‘It’s an actual 20-page document that we provide the sellers that tells them what’s going to happen, from signing the letter of intent all the way through closing, and onto integration of their firm. It’s a complete project planning document.’ Within that document, which Barton said took at least a year to put together, is a due diligence checklist with everything Mercer requires of its prospect firms. ‘It’s very standardized, very process-oriented,’ he said. ‘We have a workstream for every single activity involved.’ If mapping out that process sounds like an awful lot of trouble to go to, keep in mind that $2.4tn worth of opportunity floating around out there. To put that figure into perspective, the largest RIA consolidator in the game, Focus Financial Partners, manages just north of $200bn in assets across its 65 partner firms. The New York City-based, publicly-traded holding company has historically grown its revenue through dealmaking, either by adding new partner firms or financing sub-acquisitions for its existing partners. ‘M&A was the genesis and it has been the lifeblood of the business,’ Lenny Chang, senior managing director and head of M&A at Focus, said. ‘It’s our raison d’être.’ Chang, a co-founder of the firm, said that one catalyst for starting Focus in 2006 was a recognition that the RIA industry faced a succession crisis even as it grew rapidly from an exodus of capital from the suitability model of the wirehouses to the independent fiduciary advice model. Most RIAs, he said, were run by first-generation founders in their late 50s or early 60s, who lacked a next-generation of talent to hand clients off to upon retirement or untimely death. He said that this issue continues to plague the industry today, adding: ‘You just can’t beat Father Time.’ Meanwhile, as something of a cottage industry consisting of about 17,000 firms, RIAs have traditionally lacked access to capital to facilitate growth or succession, Chang said. He said that Focus, at the time of its founding, served as the first ‘capital conduit’ for a portion of the industry. After nearly 15 years in operation, with nearly 200 M&A deals under its belt, Focus’s business model has remained essentially unchanged while the opportunities have only grown. ‘Our business model rests on the idea of never turning successful entrepreneurs into employees – that’s our mantra here,’ Chang said. ‘It’s about retaining and accelerating the independent spirit, and having the deep pockets to provide our partner firms access to capital. It’s also, of course, about sharing best practices and adding value to the firms that we’ve invested in. But it’s a long-term marriage, and it’s a permanent capital relationship.’ Ball and chain The M&A process at Focus, Chang said, has always bent toward ‘a consultative, rather than overtly transactional’ approach. While plenty of transactions still get done, the deals that don’t get done can be just as crucial to the firm’s success, he said. The firm recently calculated that it typically does 47,000 or more outbound contacts and well over 1,000 meetings each year. Meanwhile, in 2019, the firm inked 34 deals. ‘That kind of gives you a sense of how many frogs we kiss,’ Chang said, adding that one fundamental thing that Focus looks for in a good fit is whether the prospect firm is a true fiduciary. ‘It may sound a little obvious, but it’s not,’ Chang said. ‘There are a lot of firms out there that are RIAs but aren’t actually acting in the best interest of a client. By the way, there are plenty of brokers – and we also are involved with lifting them out of the wirehouses to become RIAs or join one of our RIAs – who are acting in the best interest of their clients.’ Despite some skepticism during his early days as a buyer, Mercer’s Barton said that having ‘cultural alignment’ as a prerequisite for doing a deal isn’t just trade talk. ‘It’s no different than picking a spouse,’ he said. ‘You don’t want to wake up after the honeymoon and be in a bad marriage.’ At a minimum, Barton said he’s looking for similar investment philosophy, belief in financial planning as an important value-add for clients, and dedication to high client service standards. ‘It’s basic stuff, but if you’re not aligned on the basic stuff, you will not be aligned on the esoteric,’ he said. ‘Cultural alignment is not a throwaway, and it really comes down to whether you share the same mission, the same vision and the same values.’ Chang said that a lot can be gleaned from an initial conversation or two with a prospect firm about whether a cultural alignment is there or not, although it takes ‘many, many more interactions’ to vet that out. ‘We’re always interested in building relationships, even if it doesn’t make sense to do a deal right now,’ he said. ‘Things do change over time. Maybe a firm that wasn’t a fit for whatever reason two years ago could be a fit down the road.’
Getting across the line While Mercer isn’t ‘hurting for leads’ at this stage of its growth, that doesn’t mean it doesn’t have to do a little selling of its own, Barton said. ‘I’ll typically go to them and see their location, and check out their practice,’ Barton said. ‘I’ll do my big, full-blown, three-hour PowerPoint, walk them through Mercer and how we do things, the benefits of joining Mercer and, of course, they’re asking their questions during that presentation, too.’ Then it’s lunch, or dinner. ‘That’s where we’re getting to know one another, and that’s very important,’ he said. ‘You’ve got to get to know them personally.’
At Focus, the rubber meets the road when it puts together a data request for a prospect firm, Chang said. ‘It’s not overly onerous, but it’s a way to see if the firm is interested, because it’s a commitment to go through that exercise,’ he said. It’s also a way for Focus to get a peek under the hood. ‘We’re looking at business factors, leadership factors, the actual financials of the business, the clients, the client relationship, and regulatory compliance,’ he said. ‘However, we think of the entire process as a dual discovery process, for both parties. At every step, there should be a reaffirmation, a confirmation, of moving forward in lockstep.’ If there’s a ‘meeting of the minds,’ then getting from some initial discussions to shaking hands and becoming partners can take as little as a few months, according to Chang. At the other extreme, there are firms that Focus has talked to since its beginning that it may still partner with, 15 years later. Barton said a ‘lightspeed’ deal, from first meeting to closing on a transaction, is a six-month ordeal at the minimum. ‘You can start doing M&A tomorrow and you may not have your first close until the next calendar year,’ he said. ‘You have to be prepared to have dry spells, and you better have a lot of capital.’ Barton outlined three main reasons firms end up joining Mercer. The main reason, he said, is the family office, with capabilities such as in-house estate and tax planning. The second is Mercer’s national dedicated salesforce. ‘Our advisors are not required to win new business; all they have to do is serve clients,’ Barton said. ‘That’s unlike every other advisory firm in the United States.’ The third reason, according to Barton, is that Mercer is an integrator rather than aggregator. ‘We’re a one-brand, one P&L [profit and loss] company, and we all do things the same way: the Mercer way,’ he said, adding that firms can’t wait to have the middle- and back-office functions taken off their plates. Focus, Chang said, is meant to provide ‘all the things that can help a business that’s already successful on its own achieve its own vision of continued success,’ but perhaps getting there in five years rather than 10. In addition to bringing new partner firms into the fold, Focus is involved in all of the merger activities of its existing partner firms. ‘For some, it is literally doing everything – soup to nuts – other than the actual integration and running of the two businesses,’ Chang said. ‘For others, where the firms themselves have developed that relationship, we’re involved in the diligence and certainly provide the capital to consummate the deal.’ Mergers triple the revenue growth its partner firms achieve, according to Focus. Those who have never done a merger have grown their revenues at roughly 7% annually while those that have done mergers have grown their revenues at about 22% annually, the firm said. Nonetheless, the M&A landscape has changed since Focus and Mercer started dealing. Barton said having more than three people bid on a firm back in 2016 would have been ‘a lot,’ and that would have had to be for a larger firm. ‘Today, every M&A prospect is highly petitioned by buyers – local, regional, national,’ he said. ‘On small deals, for firms less than $200m in AUM [assets under management], you’re looking at half a dozen potential buyers, and it’s not uncommon at all to have a dozen firms competing for a high-AUM seller.’ Chang said there’s ‘no doubt’ the RIA space is getting more attention than it used to. ‘I think we’re a driver of that as a public company and in being, in many respects, a vanguard for the industry,’ Chang said. ‘We remain extremely selective in the deals we do because that’s in the DNA of our business model. We don’t chase transactions.’ Not for everyone According to Barton, unless a firm is already at scale and can absorb another firm, it has no business considering M&A. ‘I’ve seen a $300m firm try to complete the acquisition of a $200m firm, and it’s like a snake swallowing a kitchen table,’ he said. ‘It doesn’t work. There are no economies of scale there. There’s no infrastructure there to do that kind of work. They certainly can’t do this systemically.’
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Jake Martin The thankless task of setting realistic expectations for wide-eyed RIAs considering M&A opportunities tends to fall to the investment bankers and consultants. These intermediaries are often battle-scarred, and proudly so, from the explosion of deals in the RIA space over the past decade. Many come into transactions armed with quippy rules of thumb and time-tested processes. Regarding those processes, Liz Nesvold, head of asset and wealth management investment banking at Raymond James, said there are no fewer than 140 steps between signing the engagement letter and getting the deal signed. She said while it’s important to get the point across to clients early on that a deal won’t happen overnight, bankers may not want to show their hand from the start. ‘If you showed them all 140 steps, they probably wouldn’t even do a deal, so maybe we just show them the 20 key headings and tell them, “This is how long it takes,”’ Nesvold said. ‘Often, when deals go wrong before they get to signing it’s because people don’t understand what to anticipate, how long it takes, and where the bumpy patches are.’ Nesvold said the earlier she can get involved in a transaction, the better, although sometimes she is brought in to help facilitate an ongoing conversation between RIAs considering a combination with each other. ‘Most of the time, we’re brought in to help start an activity,’ she said. ‘That can be somebody who’s never transacted before and wants to acquire a firm, or somebody who decided they’re prepared to sell their firm, or maybe the partner group got together and decided they need to get bigger and look at moving onto a larger platform.’ Her team is ‘very selective’ with the buyers they’ll represent. ‘I wouldn’t just take any random buyer, because trying to transact in an all-intangible space is hard enough,’ she said. ‘Buyers really need to understand what they’re doing and that probably means we’ve spent a fair bit of time with them to get to know them before we’ve launched an engagement with them.’ However, about 70% of Nesvold’s work is on the sell side, she estimated. David Grau Jr, chief executive of Succession Resource Group (SRG), an RIA consultancy that brings together various disciplines under one roof to help RIAs make deals, said M&A in the financial services industry is ‘a niche within a niche.’ Similar to Nesvold, he said the earlier his firm can get involved in a process, the easier it is to avoid mistakes that can cause a potential partner to put pencils down. Grau said about 80% of SRG’s total deal volume comes from working as an intermediary, helping ‘more collaboratively’ with both the buyer and seller. He generally works with smaller firms that are looking to a similar practice. Often, he said, the two parties have already known each other for a long time or are at least familiar with each other. Sometimes, however, a seller will need some help at the start with identifying potential buyers. ‘We’ve got a nine-step process that helps us work through our initial talks with the seller to understand what their perfect buyer looks like. The challenge is, the answer is almost always the same – it’s themselves, 20 years ago. They don’t always articulate it that clearly, but they basically want a clone of themselves, 20 years younger.’ Grau said such clones are hard to find, but all you really need is to get close. Of the thousands of buyers out there, it’s likely only 50 or so will meet at least 80% of the seller’s requirements, he added. First things first According to Nesvold, the biggest mistake a banker can make right off the bat with a seller is to start discussing unrealistic sums of money. ‘I never overhype value, but that is often what too many bankers do,’ she said. ‘They overpromise value and underdeliver.’ It’s important to set levels with sellers from the beginning because people have a tendency to come to the table already thinking about princely sums. ‘If they heard about what United Capital traded for, or they heard about what Mercer Advisors traded for, then they’re thinking these bigger numbers. The reality is, there are very few that get to that size.’ Most of the firms that transact are below $1bn in assets. Only some are in the $1bn to $5bn range, and very few are in the $5bn-plus category. Nesvold said her team tends to work in the $1bn-plus space. The first month working with a seller is all about education, the setting of expectations, the banker’s diligence on the client, and the gathering of materials that will need to be ready. ‘People think you’re just going to get in there and start talking to people, she said. ‘You have to have done your homework.’ The banker must also do their own homework on the client, in search of any ‘skeletons in the closet’ that need to be brought to light immediately. Nesvold said the worst thing a seller can do is hide a problem that then spooks a potential buyer just when they’re sharpening their pencils on a final valuation. ‘They’re going to get priced down, your client is going to get upset, and they’re not going to want to transact. It’s really important that you do your diligence and make sure the client understands what people look at when they’re sizing up a business.’ Often it will fall to the banker to help sellers sort out what they want to achieve in a transaction and what they want in a partner. That means asking a lot of questions, such as what percentage of the firm they’re willing to sell, how important the name of the firm is to them, or what additional capabilities their clients might find attractive. ‘We’re trying to take them through a funnel process at this point, because there are thousands of people covering this space,’ Nesvold said. ‘It’s not like you can just throw up a target list and say, “Hey, let’s throw a note out to 150 friends and see if they’re interested.”’ She said RIAs are just bundles of intangible assets and ‘probably one of the hardest businesses to represent’ because they deal in human capital. ‘That human capital has needs and wants, and they have stylistic aspects to their business. You can’t just shove them into a model that’s different. You have to get very granular, and that may mean there are only a dozen likely suspects.’ Assuming the field has been narrowed down to those suspects, filing it down to the prospects means winnowing out people who don’t measure up to the seller’s ‘dream partner’ criteria. ‘You might have this dream of a perfect marriage with a partner who has these 15 things that are really important to you, but that doesn’t mean you’re going to get all 15,’ she said. ‘You’ve got to figure out where your priorities are.’ It’s not like buyers are a walk in the park either. Nesvold cited one buy-side client who thought they could do their first acquisition themselves – and talked to about 50 firms, unfruitfully, before coming to her. ‘We got into the mix and concluded that while they had a good sense for the right type of partner, the only path forward with them was to transact with 50% cash and 50% stock,’ Nesvold said. ‘That really narrowed the universe a lot. That single factor, that single way that they wanted to transact, probably could have eliminated 45 of those 50 meetings they subjected themselves to.’ Keeping ’em honest John Langston, managing director of investment banking firm Republic Capital Group, said one of the most important aspects of the job is helping RIA buyers understand how they stack up in the marketplace. ‘A lot of firms that really want to go out and make acquisitions – they have no chance, none,’ he said. ‘What they’re offering is just not that appealing. Their story’s not that appealing, the financial components aren’t very appealing, and they just don’t realize that they are really not using their time wisely.’ Langston said firms need to be realistic and understand they’re going to run up against some ‘tremendously sophisticated, well-capitalized firms with very polished, strong processes.’ In other words, it’s an uphill battle. But you don’t have to take the hill in one charge. ‘The reality is, you don’t need to beat out everybody else,’ Langston said. ‘Everybody talks about cultural fit, and I want to make sure that the culture works and all that, but there are several other factors that have to be in place. There’s got to be the feeling that the relationship is going to be transformational.’ Helping a buyer identify something that will spark excitement in a seller is the single biggest favor an intermediary can do for their client, he said. ‘It’s very hard when you’re in your own environment to understand what makes you better than others, versus a third-party, objective person going, “Here’s what you’re really good at.”’ A lot of those insights that can help buyers simply come from Republic’s work on the sell side. ‘We’ve seen something like 70 written offers in the last 14-15 months, so we know what people are offering,’ Langston said. ‘We’ve been in processes with them, we know how they approach it, so we can talk to our buying clients and say, “Hey, you’re going to probably be competing against these firms – and here’s what they’ve been putting on the table lately.”’ Dating game Assuming the hypothetical sellers and buyers know who they are and what they want, next would come the courting phase. ‘You need to have some chemistry sparks here, otherwise Client A is not going to want to acquire or sell to Partner B,’ Raymond James’s Nesvold said. ‘It’s not like speed dating, where it’s two minutes and then I ring a bell and we move on to the next person.’ These get-togethers are highly organized, she said. There’s some exchanging of high-level information, the two parties are talking about themselves and their objectives and motivations. There’s even some venturing into more granular aspects of the businesses, to test the waters. ‘You have to come away from that meeting feeling like, “You know what, that was a really good interaction, I really liked those folks, I’d like to spend more time getting to know them.”’ The banker must also be the shepherd in these interactions. ‘I often think of it as hosting a dinner party, where people don’t know each other,’ Nesvold said. ‘Your job is to facilitate that interaction so there are no dead moments, and so you try to give people some organized thoughts and let them run with it. If the conversation is going very well, I, as the host, am doing very little talking.’ Planning to meet up for an hour and a half and finding yourself well into the second hour, enjoying the conversation, is exactly what you want. ‘Remember that this is their baby. This is their professional baby, so we want somebody to fall in love with that baby, and we want our client to get really excited about the potential partner who might acquire this business that they’ve spent the last however-many years of blood, sweat and tears building. You can’t do that if you’re not at the table.’ The bottom line, Nesvold said, is that advisors have a day job and it’s the banker’s role to take a lot of the burden of the process off the client’s plate. She said having a continuous and organized feedback loop in place throughout that process is important, especially as things become ‘more real’ for the seller when offers start coming in. Nesvold said her ‘one sad event that never got done,’ was the result of a client who drifted from the process at that critical juncture. ‘The client ended up taking four vacations, including to the Galápagos Islands, the most unreachable place on earth, in the middle of a deal process,’ she said. ‘Momentum matters, time matters, organization matters and process matters, and it’s hard to put a recipe for success together if you forget one of the ingredients.’ Even after the lawyers get involved and final business terms are coming together, Nesvold said she never steps away until the bitter end. ‘You have to stay involved, because the lawyers haven’t been part of the process and they may not know certain things,’ she said. ‘I move from the first chair to the second chair, but I stay intimately involved through the duration.’ The end result may be proof of the benefit of using a banker. Though, of course, the service is not free. Like a broker selling a house, a banker is paid a fee by the seller – usually 2-3% of the value of the transaction, according to Nesvold. She also charges a retainer that’s paid upfront or monthly, in order ‘to make sure the client is honorable about the banker’s time that they are using,’ she added. Fit is king However the deal gets done, SRG’s Grau believes that starting by focusing on the right fit helps everything else fall into place. ‘When you’ve spent 20 or 30 years building a business, you don’t want to leave money on the table, which we understand,’ Grau said. ‘But the worst thing that can happen to a seller is getting an amazing offer from somebody who they’re not confident is the right fit for their clients.’ He said intermediaries have to ensure that sellers aren’t getting hung up on the price and terms, or justifying a deal that comes at the expense of a better match for their clients. ‘Don’t do that deal,’ Grau said. ‘Those are the scenarios where they’re walking through Whole Foods after the deal closes and they see a client coming down the aisle, and they have to duck down the next aisle. You should never have that scenario.’
“Trust one who has gone through it.” Virgil, Classical Era Poet
Financial advisors are dealing with a lot right now. The whole world is. But let’s focus on you for a moment. You deserve it. Because we know that in all likelihood you have been tirelessly tending to your families, your clients and your businesses – moreso than ever. We get it, and we get you. Allow us to introduce ourselves. We’re Integrated Partners, a national registered investment advisory firm in business since 1996 – built by advisors, for advisors. Our CEO, Paul Saganey, discovered early in his career that if you assemble the best financial professionals, the most trusted experts in their respective fields, and integrate them together to ensure that the most complete financial counsel is delivered to clients, amazing things can happen. In any profession – medical, legal, and our own – specialists might find themselves competing with one another, on occasion. But when they join forces to serve their patients or clients... the results are inspiring and often profound. And so not long after Integrated was born, more advisors joined. And then more CPAs joined. This may shock you, but most are still with the firm to this day. If you know our industry, as we assume you do, you know that is not typical. So why then, do our advisors and CPAs stay for the long haul? We’ve given this a lot of thought, and we think we’ve narrowed it down. We’re biased, naturally, but the truth is we do know ourselves quite well. 1 - We were founded by a financial advisor (who is still practicing his craft and meeting with clients) and we genuinely understand advisors. Your joys, challenges, priorities – we understand what keeps you up at night and what gets you fired up to get going in the morning. 2 - We have our advisors’ backs. We’ve been through three terribly volatile, gut-wrenching, stress amplifying, positively exasperating market downturns together with our advisors – and we’ve supported them every step of the way. That will never change. 3 - We don’t condescend advisors. We don’t assume you are all cut from the same cloth, have the same business goals, life dreams, or personalities. You are unique individuals, and have built your businesses as such. We applaud you. We believe in you, and your right to build your business, your way. 4 - We don’t seek to control advisors’ destinies. You might find it amusing that we’re featured in the “M&A” issue if we don’t buy practices or even stakes in them, for the sake of “aggregating” or “rolling up assets”. We run a growth-driven affiliate model designed to keep you in control every step of the way. At some point if you want to retire, we’d be honored if you considered a sale of your business to one of your trusted colleagues here. But it’s your choice, and always will be. 5 - We’ve built proven growth catalysts for our advisors. Perhaps we should have put this up top but if you don’t want to grow your business, continuously improve your client service model or generally be better every day than you were yesterday, we’re not for you. For nearly a quarter-century we have been running one of the most successful advisor-CPA partner programs in the country. More on that in our next article. We also developed a program dedicated to complete business owner support, and our advanced financial planning and practice management support divisions are, in a word, elite. We could go on. And because we have another five parts left in this series trust us, we will. But you get the idea. We are 150 advisors, 127 CPAs and $7 billion in advisory and brokerage assets strong – and growing. We are not shy about broadcasting to the industry at large that we are always on the lookout for new advisor partners who believe in our approach. Because the fact is, we believe in advisors. We walk the talk and take pride in proving it every day. Why not let us prove it to you too?
Ian Wenik The word ‘negotiation’ can conjure images of hard-headed arguments over dollars and shares. But the top dealmakers in the RIA industry say that negotiating an M&A deal is far from a purely quantitative exercise. ‘I think it’s as much art as it is science,’ Stuart Silverman, president of Kestra-backed RIA aggregator Bluespring Wealth Partners, said. ‘There’s a psychological piece of it, there’s a human nature piece of it that’s part of the art. It’s really about understanding mindset, the adjustment that a founder of a firm has to go through in giving up some control but making sure it happens the right way, or a way that he or she envisions.’ Step-by-step, here are how RIA deals get done, from building a price and transaction structure, to managing a seller’s emotional needs. Is the price right? No matter the situation or confounding factors, every RIA deal, at its core, has a competing set of interests. ‘I think the buyer and the seller are at odds to a degree. The buyer would like to invest on the most affordable basis and the seller would like to extract the highest level of value. Economically, you’re at opposite ends of the spectrum,’ Jeff Concepcion, chief executive of $13.9bn RIA network Stratos Wealth Holdings, said. ‘You assume that gets levelized to a degree, because I think the marketplace is generally more informed now than it was a handful of years ago.’ As a result, Concepcion explained, buyers and sellers of smaller to mid-sized RIAs may not sit down to the table with a tremendous gap in price, as valuation practices become standardized. But what goes into a valuation? The main appeal of RIAs, to their buyers, is their abundant cashflow and predictable revenue, thanks to the standard practice of quarterly billings based on assets under management fees. However, an RIA’s revenue figure also deserves scrutiny beyond its headline number, according to Kurt Miscinski. ‘We want to make sure there’s not concentration risk – that a large portion of the total revenue is concentrated with very few clients, because that would expose us to increased financial risk if one or two of those clients were to terminate the relationship,’ said Miscinski, the chief executive of $26bn Cerity Partners, which is backed by Lightyear Capital. ‘We will almost always place a value on another firm based on the quality of the earnings before interest, taxation, depreciation and amortization (Ebitda) we anticipate they’d contribute to our combined firm.’ Though buyers and sellers may have different ideas of how to calculate it, Ebitda is the key figure in most RIA transactions, explained Bob Oros, chief executive of serial RIA acquirer Hightower, which is backed by Thomas H. Lee Partners. The consideration most RIA buyers pay – whether it be cash, stock or a mix of both – is designed to represent a valuation for a selling firm based on its earnings. ‘At the end of the day, it is typically driven off getting to an earnings number and then applying whatever we deem to be a fair multiple to that,’ said Oros, whose firm has $57.4bn in assets under management. ‘Sometimes you don’t get [consensus]. It takes two parties who are willing to listen to each other and hear each other’s point of view. If either of us try to get greedy, that’s usually when you don’t end up finding a partnership at the end of it.’ The simplicity of crafting a valuation based on an Ebitda multiple has implications for buyers and sellers alike. It invites competition, which means that if a seller doesn’t like what they’re hearing at the negotiation table, they can easily move on to another suitor closer to their ideal valuation. For certain buyers, it means that their M&A process can become modular. Buyers can apply the same formula over and over again to selling firms of similar sizes, making it easier to complete transactions in bunches and accumulate earnings. ‘Financial acquirers use this core thesis of amalgamating Ebitda, typically with a preferred position, and think in terms of size arbitrage,’ Matt Brinker, a managing partner at RIA investor Merchant Investment Management, said. ‘The lens that financial acquirers are looking through is the financial lens. There’s a lack of concern in terms of what’s happening in the underlying business regarding the client experience… it’s a bunch of people in an office with a spreadsheet. They’re looking at it more through a risk lens, valuation and rate of return, and that’s completely fine.’ But it’s not the only model. ‘The strategic acquirers, from a valuation perspective, are looking at it through the lens of the buyer buying a firm. As a function of our firms coming together, are we improving the profitability? Are we recasting the growth curve? Are we improving the client experience?,’ Brinker said. ‘That process is a little bit more rigorous in terms of strategically looking at how the business, post-acquisition, looks.’ Those differences manifest themselves in how different RIA buyers and sellers structure deals.
The yin and yang of cash and equity Just as buyers and sellers push and pull on valuation multiples, they also try to find the right balance between cash and equity. The two instruments mean different things to the people sitting on each side of the table. Let’s start with cash. For the seller, cash can be a quick and easy way to hammer out a transaction. But few firms have millions of dollars of cash lying under the mattress. Some acquirers use debt facilities as a way to raise cash, which may not be as attractive of an option for debt-averse advisors, given the current economic climate. Stratos Wealth Holdings is one of the few firms to consistently pay its acquisition targets wholly in cash. ‘We don’t really offer equity when we’re investing. It’s our intent to be a cash investor. If someone really requires it or has a strong desire to own a piece of the holding company, that’s something we would consider, but I think we try to be protective of the equity,’ Concepcion said. ‘Generally speaking, if we’re looking at something, we’re going to be approaching it on a cash-purchase basis.’
Cash has its appeal for sellers, too. It provides an immediate jolt of liquidity, which can help founders either make a clean exit if they intend to retire, or diversify their own holdings if a large portion of their net worth is tied to their business. But unless that cash is doled out over time during an earnout period, cash doesn’t provide the same incentives for people to stick around after they sell that equity does. ‘We want to make sure that everyone’s interests are aligned. Alignment is a big deal to us. With that, we like all of our partners to have some equity in the organization so that they share in the growth and the risk of going forward,’ said Scott Hanson, co-chief executive at $8bn Allworth Financial, which is backed by Parthenon Capital. ‘Our best deals are ones where someone joins us, they take some chips off the table, they take some cash for the business today, but they also have a considerable amount of equity that they roll.’ Equity has its own upsides and downsides. For buyers, equity is cheaper to issue to finance deals – but issue too much, and you risk diluting your majority owners. For sellers, taking equity offers the promise of a windfall if the buying firm materially appreciates in value, but lowers the immediate payout. ‘We’re looking for folks to buy in,’ said Rick Shoff, a managing director of Captrust’s advisor group. ‘We want to have alignment, and the best way to get alignment is through shared equity.’ Captrust, which typically finances its deals with a hefty proportion of equity, recently accepted a 25% minority investment from private equity firm GTCR, which valued it at $1.25bn. But some firms are moving away from using equity as a be-all and end-all. Before it took an investment from private equity firm Abry Partners in 2020, Beacon Pointe used to finance its acquisitions solely through equity. The result was a complex corporate structure in which Beacon Pointe’s in-house wealth management operations sat in one corporate entity and its acquisition business sat in another. The private equity capital allowed the $11.5bn firm to merge into a single entity and bring cash to the negotiating table, which Beacon Pointe president Matt Cooper said is going to be a necessity as the M&A landscape reshapes itself. ‘The ability to now write a check gets us into the room with the other players who can write checks,’ he said. ‘And then we can shine.’
Reaching consensus Prospective buyers can shine by understanding their counterparts’ motivations. Often, sellers can equate their businesses with their identities. ‘It’s a loss of control. These are all people that started their own businesses, these are people that broke out on their own, took a huge risk on themselves and established a business. They had to make tough decisions,’ said Karl Heckenberg, chief executive of RIA investors Emigrant Partners and Fiduciary Network. ‘The biggest Rubicon that most sellers have to get over is when you’re bringing in outside capital, things are going to change.’
Emigrant Partners, which is backed by New York Private Bank & Trust, has minority stakes in 17 RIAs with around $55bn in combined assets. Taking an investment from his firm doesn’t invite the same change that comes with joining an aggregator that will force an acquired firm to stop filing its own Form ADV with the Securities and Exchange Commission. For sellers who choose to buy firms whole, negotiations can be particularly delicate. Just ask Savant Capital’s Brent Brodeski, who recently pulled off the largest RIA acquisition of his career when he purchased $1.6bn Huber Financial Advisors in a deal that closed in February. ‘Generally speaking, they’ve never done this before,’ Brodeski said. ‘It’s their baby. The reality is, the fact that [advisors] are successful makes them proud… There’s a certain pride factor that they have. As a buyer and a partner of theirs, oftentimes sellers get fairly emotional. They don’t always put things through that prism of what’s the best practice, what’s a good business decision. You’ve got to be respectful of that and patient with that. This whole process of dating is very emotional.’ Learning to manage those emotions can be an important part of completing the deal. ‘Sometimes you have to take a step back, hear the seller out and even play the part of the deal psychologist in letting them have their airspace,’ said Jason Carver, vice president for M&A at Carson Group. He added that it’s vital to ‘constantly build rapport with the seller.’ On the other side of the table, the selling advisors need to learn how to balance their emotions with sober business interests. Since that can be difficult, it may be worth hiring a consultant or an investment banker to serve as an advocate. ‘I would highly recommend a consultant. It kept the keel even in so many ways,’ said Lakeside Wealth Management chief executive Mark Chamberlain, who recently sold his practice to Captrust. He also suggests that sellers make an effort to stay focused throughout the dealmaking process. ‘I would make sure I knew what outcome I wanted before I started the search,’ Chamberlain said. ‘It stops you from fishing blindly, versus “I’m on a mission to find a fit that suits the priorities that I have.”’
A former General Manager of IBM, Michael Rouse now leads fintech startup Creativemass, based in Melbourne and New York. The company’s flagship product, WealthConnect, provides an end-to-end wealth management solution built on the bedrock of Salesforce, with dashboards for everything from core portfolios to sales leads.Here, Michael discusses his vision for the product, how he was inspired by Steve Jobs and how his company is using AI to make wealth management smarter. Can you describe your inspiration for the product? Well the immediate trigger was a report by an Australian Royal Commission report last year, which highlighted the fact that across financial services, the customer had been forgotten. One story was that an elderly lady had deposited a large sum of money as a risk management strategy, and over 10 years the fees had actually outstripped interest. The institution hadn’t even been looking at the client outcome. But we’re also seeing a deeper trend, what we call a complexity shift. Things that RIAs and fund managers used to worry about - the portfolio system, for example - are now commodities. Really, they just need to work. The real complexity lies in engaging with clients and helping them understand products and services. We’re technologists first and foremost, and that allowed us to examine the problem from a neutral standpoint. We found that many financial products had been developed under more complex regulatory environments, and a more client-centric option was needed. One of our real inspirations was Apple, and the concept of ‘subtraction.’ When Jony Ive and Steve Jobs took the BlackBerry and decided to put their own keyboard on the screen, they made their product more usable — by taking something away. People are using amazing technologies in their daily lives, like Google and the iPhone. Our goal is to replicate this experience, and reduce the gap between the specialists and the client. How have you applied this philosophy? We deconstructed all the standard wealth management workflow processes and got to the core elements that people actually use. We’ve automated as much as possible in the back office, lowering the cost of service. If you’re advising on a switch to a new product, our platform can offer an instant assessment on a five-year performance, the fee differential, and then assess whether it passes the ‘client best interest’ test. Another example is the product disclosure statement. Often, these documents are 70 pages long. We’ve broken it down into four main pages with only the key information - the basic price, the fees, a performance graph. But we also want to replicate the intelligence of the technologies I’ve mentioned. Their ability to adapt to the user. So, with our platform, you can rebalance around both listed an unlisted investments, but we’ve taken it a stage further: you can rebalance around your goals, too. Let’s say you’ve a college education fund, and it’s gone down. With our system, you can say ‘hey, I need X thousand dollars to get back on track. I actually need to put some money in from another asset.’ A pure financial system can rebalance equities and asset classes, but it can’t factor in your personal goals. We think this is a major advantage of our system. I guess Salesforce is a major asset… At the outset, we asked ‘what’s the best engagement tool on the planet?’ It was a CRM tool. Salesforce understands the concept of an investor, an advisor… and the ways to engage with clients. A typical adviser might write 300 updates to individual clients every day. The Salesforce approach is ‘let’s write three emails.’ Salesforce is also an incredible development framework, used to build over 5,000 applications. We get access to all new Salesforce capabilities, which has helped us leapfrog larger competitors laden with technical debt. Can you talk about some of the specific innovations? One example is the rules engine, which provides an alternative to traditional manual compliance. Fundamentally, compliance is about data; things like a person’s age or risk profile can be easily codified. And the data’s right there in the CRM system. On our platform, all the key information gets entered into our database, and we can build bespoke rules on top. When those rules are infringed, the system generates a note or an alert for the compliance officer — thus allowing the compliance team to be proactive, rather than reactive. We’ve also created a financial planning wizard, which strips planning down to its base components and presents client data in a common-sense way. So we offer a list of assets and liabilities, populated automatically from a webpage the client has filled in, and this data builds into more advanced functions like cashflow and networth modelling. AI is a big part of fintech today. How have you incorporated it? Using Einstein, Salesforce’s AI software, we’ve created ‘Next Best Action’, which represents significant events in our clients’ lives, like buying a new house, and advises them on a particular course of action. We’ve also developed an Investment Assistant, an intelligent chatbot that examines data in our database and gives contextual responses. We’re now working on a ‘Best Interest Score’ for our next release. So rather than a binary ‘yes or no’, we offer an understanding of a client’s overall best-interest performance relating to things like documentation, fees, service and product complexity. So clients can show how they are meeting compliance expectations in a concise manner, which can be presented during regulatory exams or routine audits. Who is your core audience? Well we thought it was entry-level investors, but we’re actually getting a lot of tier-one companies who like the simplicity and the fact we’re a major player on Salesforce. You’re active in seven countries. How have you ensured universal compliance? Actually, there’s a lot of commonality between all regimes. Essentially it’s all about the umbrella of ‘best interest.’ What we’ve done is create a macro set of rules across Canada, the US, Australia, New Zealand, South Africa and the UK, and we tend to adapt or turn off rules for particular jurisdictions. Of course our compliance officers stay up to date, but in truth regulated best interest is just a subset of the more codified tests in Australia and the UK, and it’s relatively straightforward to adapt to the U.S. Aside from compliance, what are your main challenges? We’ve got north of $20 billion on our platform, and that’s growing. So as well as being secure, we have to be incredibly robust operators. Again, Salesforce is a real help: not only is it encrypted, it offers a specialist governance platform called Salesforce Shield, which secures the entire network down to the field level. At the same time, we want to evolve beyond a financial platform. Things like client surveys and engagement scores… we’ve got all that capability straight out of the box. Finally, where are you looking for expansion? We’re really building out our infrastructure in the U.S., and we see UK as another key market. We’re also having success in Australia and South Africa, and we believe the secondary markets - Canada, Singapore, Hong Kong - will come afterwards.
Michael Rouse Managing director of Creativemass Enterprises
Ian Wenik Getting the deal done was the easy part. The months after an RIA transaction closes can be very difficult. Clients need to be convinced to come along for the ride. Email addresses need to be changed. Employees need to adjust to new roles.It’s not flashy work, but if something goes wrong, the consequences can leave both sides wishing they hadn’t signed in the first place. ‘Change is hard. What’s interesting — and I think Covid-19 puts this in perspective — is good change and bad change are equally as stressful to people,’ said Brent Brodeski, chief executive of serial acquirer Savant Capital Management. ‘One key thing is recognizing that human aspect.’ How it works For sophisticated buyers, integration has been refined to a science. Many serial acquirers have multiple staffers dedicated full-time to M&A integration and have dedicated checklists for the process which cover everything from merging software systems to client onboarding. At Hightower, which employs roughly 16 M&A staffers full-time, integration after a deal closes can take a full year. The firm has an extensive list of key performance indicators (KPIs) to ensure the transition is on the right track. ‘The first set of KPIs are all around milestones on the timeline. It starts with [client] consent, because most of these are done via negative consent, meaning we are assuming the client agreement that is already in place,’ said Bob Oros, Hightower’s chief executive. ‘We’re expecting a minimum of 95% consent and we achieve it. That is a big one, and once we have consent, it actually triggers close.’ Once clients are onboarded, Hightower can begin to move through the more humdrum aspects of transition, such as switching portfolio management software providers. But even these steps come with their own share of pitfalls. Emotional issues If the decision for an RIA owner to sell their practice is a wrestling match between a person’s ego and their own business interests, then the transition process is Wrestlemania. A selling firm has to safely navigate its employees onboard the buying firm once the deal closes — and the staffers who choose to make the leap from the selling firm to the buying firm may see someone else already occupying their position. Managing a transition has its own unique psychological pitfalls, explained Beacon Pointe president Matt Cooper. For instance, lead advisors at the selling firm may not be satisfied with their new titles in the combined firm, he said. Those kinds of issues can get negotiated away, but an ounce of prevention is worth a pound of cure. The best solution for personnel issues may be for the seller to figure out before a deal closes which of their employees are in it for the long haul and which ones are out. ‘A lot of the time when I get involved, the selling firm has already made the decision about who they’re going to carry on with,’ said Karisa Diephouse, Beacon Pointe’s director of strategic integrations and operations. For sellers-to-be, the impending transaction ‘gives them a reflection point to evaluate their staff and decide who’s going to rise to the challenge,’ she added. At $1.6bn Huber Financial Advisors, negotiating a safe landing for the firm’s 28 employees once it was acquired by Savant Capital Management was a tricky task. Some titles matched up easily, but others took more work. Huber Financial had a chief investment officer (CIO), Phil Huber, while Savant did not have a CIO at all. ‘They worked by an investment committee. Phil has had good exposure in the industry and good leadership,’ recalled Dave Huber, Huber Financial’s chief executive and Phil’s father. ‘Savant felt it was time to have a named CIO for the firm and Phil fit that role very well for them. He’s integrated nicely with their investment team.’ Technical difficulties Title changes can be explosive, but many integration issues are much more anodyne. RIAs can serve complex clients, and it can be particularly tough to transition over financial planning, performance reporting, trading and portfolio accounting software from one established firm to the next. At Cerity Partners, which has its own 20-person integration team, the most complex challenges arise out of tech issues. ‘Often, the integration of the portfolio and investment accounting systems is the biggest [hurdle] on the list,’ said Kurt Miscinski, the firm’s chief executive. ‘There’s so much data often involved and a lot of historic data and performance that’s very important to the client and to the client relationship. When you have an integration, no colleague wants to lose the history of what they were doing with a client.’ The biggest technical headache of all may be repapering clients if they need to move their assets from one custodian to another, which is a lengthy and time-consuming process. The repapering issue is one buyers can address themselves before a deal gets done, often by affiliating themselves with as many custodians as possible, which can help blunt some of the pain. For example, Stratos Wealth Holdings has custodial relationships with LPL, TD Ameritrade, Fidelity and Charles Schwab. ‘When we’re integrating an acquisition, we’re not going to move custodians,’ said Lou Camacho, president of Stratos Wealth Enterprises. ‘It’s not always paperwork, but you’re still in a lot of cases repapering accounts for new RIAs. Those things are painful. But I would say the data transition [is most difficult]. Switching customer relationship management (CRM) software, performance reporting, portfolio accounting systems, data aggregations, planning systems. ‘It’s expensive, time-consuming, and even if you do everything right, it feels clunky to the acquired firm.’ Diving in Sellers have their own adjustments to make. In many cases, they’re joining a firm larger than themselves, with more employees and a different way of doing business. ‘The transition of technology and being sure that we are retaining all the key data and all the key performance analytics for our clients is something that’s going to take time,’ said David Aaron, who served as co-chief executive of EMM Wealth in New York City before he sold it to Cerity Partners in late 2019. ‘There’s a great team that is building work groups and discussions and mapping, but we’re being prudent about it.’ But Aaron is already seeing the benefits of being part of a bigger organization. EMM managed around $3bn before its deal. Cerity Partners currently manages around $26bn. Aaron has seen Cerity Partners’ leadership be receptive to his firm’s ideas, and he’s confident that the partnership will work out in the long run. ‘As we brought in these ideas that were identified as best practices, there’s tremendous pride of ownership. “Wow, we really did build something! Wow, Cerity Partners is a lot bigger than we are, but they still think that we’ve done something interesting in this area and they’re adapting it across the firm,”’ Aaron said. ‘That was appealing to us, and it has played out extremely well.’ Looking forward The RIA M&A landscape has changed dramatically over the past few years. There have never been more deep-pocketed buyers and there have never been more motivated sellers. Though the pace of dealmaking has somewhat abated in recent months due to the coronavirus, the fundamentals which led to 203 wealth deals going off in 2019 (per Echelon Partners) are still in place. Institutional buyers want steady cashflow and prospective sellers want growth capital or a painless exit. ‘It’s a much more formal, sophisticated environment now,’ Cooper said. ‘More people who are considering a merger or sale of their business are using sell-side advisory firms, and the investment bankers in our space have gotten a lot better as well. You’ve got a more professionally run process now.’ But even as the process refines itself, M&A in the RIA world is fundamentally about a connection between two groups of people, each of which think they stand to gain something from the other. When a deal is executed well, the buyer, the seller, and the clients all end up better off. ‘For many sellers, this is their biggest asset, this is their life’s passion. They’ve spent their whole lives building this business,’ said Stuart Silverman, RIA aggregator Bluespring Wealth Partners’ president. For the deal to ultimately work well, he has to ensure ‘that there’s a cultural fit and a strategic fit, that there’s trust, that we have similar values and goals,’ Silverman said. ‘If that’s not there, then there isn’t a good foundation to start anything.’
Rick Studer, SVP, Head of the RIA Consultant Relations Division at PGIM Investments discusses the future of the RIA business in a rapidly evolving landscape. You’ve worked in the industry for nearly 28 years and at PGIM Investments for the past nine. What are the notable changes that you have seen in that time? We’ve seen so many big changes in our industry over 28 years that it would be impossible to discuss most of them in this interview, but I will focus on a few. When I started in the early ‘90s our interactions with advisors were about things that can now be accessed at the push of a button - questions about various share classes, yields, top holdings, or sector weightings. Today, having a deep understanding of the capital markets, portfolio construction, and asset allocation is table stakes when it comes to serving the needs of RIAs. We need to be able to bring comprehensive expertise and solutions that are actionable. Our team must be able to clearly convey how our people, process, portfolio construction, and risk management are differentiated. Research analysts want predictability and to understand how a given strategy will perform in various market scenarios. Additionally, our strategies must be properly represented quantitatively and qualitatively in all of the third-party databases available to RIA research teams. It’s really no different than how much the advisers have had to change over the last 28 years. Advice today is much more comprehensive with the enhancements to powerful financial planning tools that incorporate a client’s income statement, balance sheet, tax planning, estate planning, etc. They can’t just try to compete on investment performance. What are the current drivers for growth you see in the RIA space? Alongside the benefits of starting and building their own businesses, new entrants to the RIA market have access to more technology and support than ever before. There are great technology solutions for front, middle, and back-office, in addition to more choices for legal and compliance outsourcing support. Given the fee compression and other limits of working in wirehouses and elsewhere, many RIAs see the benefit of striking out on their own. For larger, more established firms that already have the processes and technology in place, M&A can start to make sense because that’s a way to bring on RIAs that are a cultural fit and a client fit. Access to capital to do M&A is also more abundant than ever before. Custodial partners and private capital partners are willing to finance RIA M&A transactions, which is meaningful for firms that want to scale their businesses. For those RIAs that want to focus more on advisory work and less on the operational aspects of running a business, including constant technology and compliance updates, merging with a bigger platform where that infrastructure is already in place could make sense. What do you see as the biggest risks and opportunities facing RIAs? As mentioned, there are a lot of new outsourcing resources available to RIAs in terms of investment, operational, and compliance support. At PGIM, we spend a lot of time with RIA investment committee members trying to help them with capital market research, asset class specific analysis, and portfolio construction. We’ve had the same team in place for almost a decade, so we’re able to work with RIAs over a series of years to build trust and bring the totality of expertise within PGIM into the conversation. Each of our Regional Directors has an informal advisory council where we connect RIAs with other RIAs to facilitate conversations where they can share best practices and other information. That helps us create opportunities within the RIA community and helps us develop solutions. As M&A continues, we hope to have built a long-term trusted relationship with both the acquiring firm and the acquiree. All of that said, RIAs are faced with a number of risks. Many RIAs are dually registered which increases their compliance burden reporting requirements. No different than our business as an asset manager, there is growing disparity between the biggest RIAs that have built significant scale and the smaller RIAs. This can create pressure on smaller firms to keep up with the marketing, operational, and compliance budgets of the larger firms. It’s a technology arms race and smaller firms will have a tougher time constantly monitoring and updating their tech stack, which is why many are choosing to outsource to the successful TAMPs. Some of the biggest firms offer cutting edge technology that includes digital onboarding of clients and a seamless mobile experience. The pressure to compete with the biggest RIAs and platforms is accelerating. How is the growth of the RIA channel influencing distribution strategy decisions? Many asset managers see how the RIA space is growing and have invested in dedicated distribution resources. However, that comes with its own risks. After several years of disappointing growth, some asset managers have grown impatient and pulled out of the space. The RIA market tends to be fragmented, with varying business types, so it can take years to see meaningful results. At PGIM, we are committed to the space and are focused on the long-term. We’ve had the exact same team in place for 9 years working with the large fee-only RIAs in addition to working closely with our 35 independent broker dealer wholesalers that cover thousands of other firms. This way we can provide support to both the well-established large fee-only RIAs in addition to the new breakaway firms, dually registered, and Hybrid RIAs. Sometimes we’ll work with an RIA for a few years before we see an allocation, but that’s part of relationship building. RIAs are seeking more in terms of bespoke customized solutions as well as alternative investments for their clients. How does PGIM work with those requests? We’ve worked very closely for years with our institutional asset management and product development teams, which allows us to focus on exactly what issue the RIA is trying to solve. We’ve partnered with RIAs that have created their own funds and hired us as sub-adviser using a custom separately managed account. Our institutional capabilities enable us to provide access to hedge funds, private debt, and private equity real estate for certain RIAs that want true alternatives exposure. We are a top ten global asset manager [1] with in-depth expertise across multiple asset classes combined with disciplined risk management processes. What changes do you expect to see over the next five years in this industry and how is PGIM positioned to grow with your RIA clients? There are many ways I could answer this question. The biggest themes that I’m seeing right now are the growth of TAMPs, OCIO platforms, and other outsourcing solutions. All of these areas will continue to grow and gain influence as the RIA market continues to expand. RIAs that already have a national presence will continue to grow the fastest which will also have a significant impact on the industry. They’re focused on creating bigger relationships with fewer asset managers, which means that PGIM has to be able to create and provide solutions that meet those needs. More RIAs are interested in custom solutions, so asset managers have to be willing and able to bring in different types of expertise to solve for those unique requests. Finally, as the RIA space continues to grow rapidly, asset managers have to be prepared to provide solutions to the small RIAs as well as the large ones. That requires a lot of internal collaboration and support and at PGIM we’re fortunate to already have that culture in place.
Rick Studer SVP, HEAD OF THE RIA CONSULTANT RELATIONS DIVISION
1 Prudential Financial is the 10th-largest investment manager (out of 526) in terms of global AUM based on the Pensions and Investments Top Money Managers list published on 5/27/2019. This ranking represents assets managed by Prudential Financial as of 12/31/2018. Investing involves risk. Some investments have more risk than others. The investment return and principal value will fluctuate and investor’s shares when sold may be worth more or less than the original cost. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. © 2020 Prudential Financial, Inc. and its related entities. PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. Clients seeking information regarding their particular investment needs should contact a financial professional.1036476-00001-00 Expiration 11/28/2021
