Before RIAs engage in merger and acquisition activity, they must have solid organic growth. This was the view of a three-member panel organized by New York-based public relations firm JConnelly to discuss growth strategies for financial advisory practices.
“You can’t look at M&A and organic growth as interchangeable,” said Brandon Kawal, principal at Advisor Growth Strategies, a management consulting and transaction advisory firm for financial services companies. “You have to first look at organic growth and then look at M&A as complementary or supplemental. That’s fundamental.”
Raj Bhattacharyya, CEO of Robertson Stephens, a San Francisco-based wealth management firm, spoke about why RIA practices pursue M&A opportunities. They must feel that they need something they don’t already have, he said. It may be talent, particular skills or services, or perhaps an expansion of their geographical footprint.
“M&A for purely financial reasons won’t work,” said Bhattacharyya.
The need to add fresh talent can be vitally important. “The talent war in this industry is real,” said Marc Cabezas, executive director of mergers and acquisitions at Hightower Advisors, an RIA firm headquartered in Los Angeles. “M&A is a great way to add talented people.”
This kind of inorganic growth, he added, should never replace organic growth. But it can add to or enhance a practice that already has solid organic growth. “Inorganic growth can be very additive to a firm that’s already growing well organically,” said Cabezas.
The moderator, JConnelly’s Tony Kono, a managing director, asked about what signals the need to seek outside capital for growth.
“One of the clearest signals,” said Cabezas, “is if the firm is losing out on opportunities … because of deficiencies in the business.”
Those deficiencies, he said, might have to do with talent but they might also concern a gap in technology or particular skills that clients need. Sometimes partnering with an outside firm or seeking outside capital is the best way to close those gaps.
“It ultimately comes down to whether [the firm] wants to use that outside investment to build those capabilities themselves or seek a partner that already has those capabilities,” he said.
Expectation plays a big part in the success of any M&A deal, the panel agreed. In fact, misaligned expectations are one of the biggest red flags for a bad deal, said Kawal.
“If you can nail down exactly why you’re doing a deal and where you want to take the business, you can structure the deal to help you get there,” said Bhattacharyya. Without that clear guidance, he added, it’s hard to create a new structure that will “amplify the firm.”
Kawal said that he’s against the “aggregator” idea—referring to firms that aggressively buy up many smaller firms simply to amass value—because it implies that nothing matters in dealmaking except the financial implications. Numbers alone, he said, don’t determine the success of an M&A deal.
“Cultural alignment is important,” he said. “It means I can work with these people and I like what they do and it fits with our organization.” Cultural alignment helps build trust, he explained, and trust is essential for the success of any organization. “If you don’t have trust, it all falls apart,” he said.
The panelists later commented that no transaction ever goes 100% smoothly. M&A is never an easy process. You need trust to overcome the inevitable bumps in the road, they agreed.
Cabezas and Bhattacharyya added that the idea of trust must be carried out throughout the organization. That includes keeping lower level staff apprised of any deal negotiations. The more you have employees as part of the coming together, they said, the more likely you are to have strong continuity.
“Don’t wait [to inform employees] for the last week before the deal closes,” stressed Bhattacharyya.
Kawal concurred. Particularly as firm founders move toward retirement, he said, the up-and-comers in the organization must be engaged in the practice’s growth and prosperity. “If they are not on board, they will vote with their feet,” he said. “You have to have the next generation on board.”
The next topic concerned the buyer’s perspective. Buyers want to unlock value, the panelists agreed. They may want to acquire the book of business of a practice in which the founder is looking to exit, or they may have some other strategy for increasing value. In addition, when a smaller firm becomes part of a bigger firm, its trading value can instantly increase just by virtue of being part of a more valuable enterprise, noted Kawal. “It’s a bit of arbitrage,” he said.
Bhattacharyya said that the reason people join Robertson Stephens is because they believe it can accelerate their growth. Everybody benefits from that.
This promise of unlocking value is “why we see so much capital in the space,” said Kawal. “This is not a declining industry. It is a growth industry.”