Stories from the trenches: how buying and selling advisory firms is changing.
Make no mistake-when it comes to mergers and acquisitions among advisory firms, it's still a seller's market. But that doesn't mean buyers aren't striking deals that fit their strategic needs superbly, too. Just ask Augustine Hong, who acquired a Virginia planning firm to help his New Jersey-based money management business launch wealth management services. Or Michael Leonetti, who is growing his advisory firm by folding existing practices and practitioners into his Buffalo Grove, Ill., company.
These folks are part of a new breed of advisors who want to get bigger and are willing to make strategic acquisitions-sometimes more than one- to do it. The action is reflected in the accelerating pace of acquisitions in the wealth management industry, according to Berkshire Capital Corp. In fact, wealth management firms were the one shining star in an otherwise retreating M&A marketplace among asset management firms. While overall M&A transactions declined by 11% in deal value (to $9.3 billion) and transferred assets under management fell to the lowest level ($375 billion) in a decade, activity among wealth management firms soared. At the high end of the market, Mellon Financial acquired Atlanta-based Arden Group and its $750 million in client assets, adding a strategic Southern presence to its $69 billion, 60-office wealth management business.
But big firms were not the only sector of the market busily being courted and acquired in 2003. More than 2,850 buyers, who range from smaller practitioners to CPA firms and broker-dealers, are currently registered on FP Transitions, a Web-based brokerage service for advisory firms. More than 150 firms sold through the service in 2003, and there were about 30 potential buyers for every seller. As important, average down payments and selling prices also jumped in both 2003 and 2004, says David Grau, president of parent company Business Transitions LLC, Portland, Ore.
The average sales price for fee-only firms rose to 2.08 times annual gross revenues in 2003, while commission-based shops sold for 1.1 times annual gross revenues.
"Most of the sellers we see are still one-principal shops with zero to five-person staffs and $10 million or less in assets. Buyers are all over the place but tend to mirror the sellers, though a third of buyers tend to be bigger, out-of-state firms," Grau says.
While large acquirers may want to buy businesses and leave principals in place to grow assets, that is less often the case when smaller practices are acquired.
One major factor driving M&A, although not the only one, is the aging advisory population. Simply put, older advisors are steadily moving toward retirement. The average age for fee-only advisors is 48, while the average age for an independent registered rep is 50, says Chip Roame, president of Tiburon Associates. "The industry is steadily aging, while at the same time interest in advisory firm acquisitions remains high, a combination that is likely to create more M&A," Roame says. "At the same time, the big stock market downturn made for an exhausting ride for some planners and advisors who may not want to rebuild their practices," the consultant adds.
Age and the desire to golf motivated Tom Grzymala, principal of Alexandria Financial Associates LTD, in Alexandria, Va., to start thinking about retirement about three years ago. "I'm 63 years old, and it's time to start slowing down a bit and enjoying more golf courses," Grzymala, a former Navy commander, declares.
To prepare to sell his firm, which had $85 million in assets under management, Grzymala and his partner and wife, Barbara, who ran the firm's tax practice, began to transition clients to other planners at the firm starting about three years ago. The purpose, Grzymala says, was to create a turnkey business that could be sold seamlessly, without having to disrupt client relationships. Advisors at the firm were fully apprised of the Grzymalas' desire to sell and were given the first right of refusal, but declined to purchase the firm.
To find a buyer, Grzymala listed the firm on FP Transitions and got about 30 inquiries. They seriously interviewed about eight firms before deciding the best fit was Augustine Hong and his partner, Munish Sood, who run Botree Asset Management, a Princeton, N.J.-money management firm with $1.2 billion in assets from institutional clients. Working with individual clients appealed to them as an opportunity to diversify.