Asnoted in the lead story of this special section on succession planning, “Planning for Your Future, 2010 could be the biggest year ever for mergers and acquisitions in the financial advisory industry, but the players and strategies are different than they were prior to the market turndown. Previously, large banks and financial firms aggressively pursued successful wealth management firms with affluent clients. Those buyers have been replaced by more selective RIAs looking for a variety of arrangements including complete buyouts, slow sell-offs, mergers, hiring advisors from the wirehouses, formal networks, and mutually beneficial strategic alignments.
Consolidation among RIA firms has increased for several key reasons, according to Tiburon Strategic Advisors, which foresees a 40% increase in merger and acquisition activity between 2007 and 2012:
The average age of firm principals has increased from 51 to 55, so these baby-boomer advisors will seek ways to monetize their practices as they approach retirement.
Younger advisors are seeking ways to increase profitability by reducing overhead, so combining practices is very attractive.
For firms that have a focus on high-net-worth (HNW) and ultra-high-net-worth (UHNW) clients, activity has occurred in four major directions, according to industry observer Chip Roame, Managing Principal of Tiburon Strategic Advisors:
- o More wirehouse reps joining existing larger RIAs
- o Success of some networks among larger RIAs
- o Former wirehouses executives hired to recruit for large RIAs
- o Emergence of firms allowing advisors to retain ownership of their book of business when they join and later permitting them to sell their business without the restrictions common in wirehouses.
Looking at retaining some equity position rather than selling outright for a succession plan, more wealth managers are structuring deals with internal firm partners to sell part of their equity initially and retain the rest as a slow sell-off over several years. In this way, the seller gets some cash upfront but participates in profits during the rest of the term. The total value the owner receives can be far greater by this kind of arrangement. The growth in the equity portion will generally grow faster than the cash part invested in the stock market.
“At any given time, advisors just reach the point where they’re ready to retire,” notes Daniel Seivert, CEO & Managing Partner, Echelon Partners, Manhattan Beach, California, an investment bank and consulting firm focused exclusively on the wealth and investment management industries. “Some people are just ready to retire when it becomes a bad time to sell. Most of them just wait it out until the markets recover and then sell. So now, there’s some pent-up supply as a result of that, but they’re not settling for less attractive partners. They usually have pretty flexible time frames, so most of them are waiting around and being selective about whom they do a deal with.”
Sellers do have some advantages at this point, however, advises Seivert. If you’re eager to transfer ownership to family members, partners, or employees, lower valuations make it a good time to sell equity while minimizing taxes. Today’s buyers are better grounded in the wealth management model than many of the buyers before 2007, some of which no longer exist or have shrunken value. In the push toward independence from large firms, especially from the wirehouses, disgruntled advisors seeking to merge with existing RIAs will find custodians, attorneys, investment bankers, and others able to facilitate these deals.
These unhappy advisors are reconsidering their options for several reasons, according to Echelon Partners. The strong drives to leave include:
- o firm reputations tarnished in the down market
- o firms with tough rules and bureaucracies that attempt to own the client
- o firms with uncertain futures and leadership
- o firms where a new culture focused on producing business has replaced an old culture based on trust and relationships.