Anatomy of an RIA Acquisition by yaoyufang


									Anatomy of an RIA Acquistion

• Derek Bruton, EVP, National Sales Manager,
  IAS, LPL Financial Corporation
• Jeff Rosenthal, SVP & CMO, Triad Advisors, Inc.
• Moderator: Philip Palaveev, President, Fusion
  Advisor Network

Why RIAs?
•   Fastest growing part of the financial services industry
         15,000 firms 9,000
     – ~ 15 000 firms, ~9 000 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

Does it matter that they are RIAs?
•   Does not matter                 •   It makes a big difference
     – Similar profile of the             – RIAs are culturally “allergic” to
       advisors\principals                  BDs
     – Common background – they           – Steep resistance from the
        ere          ith
       were once with BDs                   c stodians
     – Common culture in many             – Introduces the RIA to FINRA
       aspects                              rules adding complexity and
     – Similar business practices           risk
                                          – Tangle of economics may
                                            frustrate them – platform fees,
                                            haircuts, different contracts,

Why Not RIAs?
•   They position, present and think of themselves as the “opposite
    of the BD culture”
     –   Fiduciary relationship
     –   Anti-commission
     –   Suspicious of haircuts and platform fees
•   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
     –   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
Two Distinct Markets
•   Large Institutional Firms – Over $500 million in AUM
     –         p                p
         Multiple owners and depth of talent
     –   Employee advisors – non-owner, salary compensated, significant role in client
     –   Standardized delivery, sophistication, well developed back office
     –   Powerful local brand
     –   In high demand, premium pricing and multiple buyers vying for the deal
•   Small “Practices” – Under $100 million in AUM
     –   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
Who Is Buying?

                      gg          y    pre-crisis and
• Before and after – aggressive buyers p
  fewer buyers today
   – Consolidators – struggle with profitability and payments due. Have
     stopped acquiring and have even unwound many deals. Uncertain
         pp      q      g                              y
     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

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

Advisors as Acquirers
•   Advisors are looking to grow
            g     y           y      y
     – Intrigued by the ability to buy 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
•          o edge of the buyer s ey
    Good knowledge o t e buye is key
     – 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
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

Who is Selling?
1.   Large firms who see a merger as      •   Example - $500,000 in fees
     a way to grow ffaster and obtain          – Take-home per owner is
     new capabilities                            around $300,000
2.   Large firms who are looking to            – Valuation is around $1 million
     deal with owner succession and            – 5 payments of $ $200,000
     new owner introductions                     +interest
3.   Small firms who are facing
                                          •   Wh sell?
                                              Why ll?
4.   Small firms who are getting out of
     the business                              – Only if advisor does not want
                                                 to work any-more
5.   Small firms who are getting

Valuations and Terms
•   Ultimately valuations focus on cash flow of the acquired firm – present value of
    the transferable cash flow stream
•   T       ti    h
    Transactions have been b t
                        b    between 5 – 7 X EBOC (        i    before owner
                                                     (earnings b f
•   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

•   Valuations seem to have held but payments are heavily skewed to contingent
    forms of consideration
How Can You Help Advisors?
•   Education and information
•   Asking the tough questions
    A ki th t      h     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

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
• We will see some of the larger RIAs compete as “fee-
  only” broker-dealers
Case Study #1 – Textbook transaction
   Seller ‐ John W.          Buyer – Andrew D.

Age 56
Age 56                      Age 48
                            Age 48
$357,000 revenue            $1.2mm revenue
$57mm AUM                   $111mm AUM
First‐time Seller           First‐time Buyer

 29 inquiries and three offers in 30 days
 29 i     ii      d h      ff i 30 d
 Engaged B/D and counsel early and often
 Best fit vs. best offer
 Client retention nearing 96%

Case Study #2 – Textbook Opportunity, Poor Execution
        Seller – Thomas D.            Buyer – Steve F.

       Age 66                      Age 55
       $90mm AUM
       $90      AUM                $125
                                   $125mm AUMAUM
       Passive investment          Passive investment 
       philosophy                  philosophy
       Intimidated by growth                   yg
                                   Motivated by growth

         Looked good on paper
         Past experiences were aligned; future plans never 
        laid out
         Sellers lack of focus on clients killed the deal
         Client retention = less than 10%
         Client retention = less than 10%

Case Study #3 – Incorrect Expectations
   Seller – Walt Y.             Buyer – Dan H.

 Age 81                       Age 48
 $200mm AUM
 $200     AUM                 $375     AUM
                              $375mm AUM
 Uses TAMPs, fixed            Mutual funds, 
income                       separate accounts
 Perpetual seller              pp

 Buyer willing to be flexible, but not unrealistic
 Product mix differences were an obstacle
 Succession planning was focused on price, not 
 3 trips to the altar but no marriage
 3 trips to the altar but no marriage

     Case Study #4 – Opposites Attract
   Seller – Vincent C.        Buyer – Janice W.

Age 58                       Age 47
$450mm AUM
$450      AUM                $720
                             $720mm AUM AUM
Skilled portfolio manager    Skilled salesperson
Fee plus commissions         Fee only
Riding into sunset                   p
                             Career peaking g

   Good “marriage” of strengths
   Seller coaches, retains then retires
   Flexible business model is attractive
   >95% retention plus 15% increase in new 

Case Study #5 – Dating before Marriage

    Seller – Cathy J.          Buyer – Joseph D.

  Age 45                       Age 55
  $275 000
  $275,000 revenue             $1 1
                               $1.1mm revenue
  $51mm AUM                    $90mm AUM
  Wants to grow, but           Looking for a 
 capital is scarce            successor

  Sole practitioner finds continuity partner
  50% stake sold over 4 years
  Synergies achieved lead to larger, more profitable 
  Succession plan in place
  Succession plan in place

• 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?

            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

            Tools Provided
• Internal Matchmaker
• Education
•          g
  Due Diligence assistance
• Valuation Guidance – it is not always about “The
• Risk Mitigation
• Funding?

      What an Advisor Needs to Consider
As a Buyer                              As a Seller
•   Type of Practice – Culture          •   Why am I selling
•   Client Base                         •   What does my ideal buyer look
•   Geographical Limits                     like
•   What can I afford                   •   Time Frame for exit
•   Should the present owner remain     •   Have I placed a realistic value on
    involved – for how long                 my practice
•   Do I want to keep the staff         •   What are my deal killers
•   Technical expertise coming with     •   Do I need cash or can I accept
    purchased firm                          financing for the deal
•   Is my pricing consistent with the
        yp      g                       •   What are my alternatives (Partial
    other firms                             Sale, Internal Sale)
                                            S l I t       lS l )

Compliance Concerns
1.   Record Retention Periods
2.   Standard of Care
3.   Privacy
4.   Licensing

         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.
     –   RIAs           i d to keep th f ll i records f th stated period: Fi years: records of original
         RIA are required t k       the following      d for the t t d       i d Five             d f 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.

     Succession Planning
• Starting Point – get emergency plan in place to
  enhance value of business at its sale
• Acquisition planning

Sample Checklists and Other Tools


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