M&A activity among RIAs is solid and likely to continue. Demographics play a role, as many advisors are getting older and looking for a profitable exit. Private equity sees a way to upsell an industry by aggregating RIAs and selling them for a more significant multiple. For various reasons, there is a window for you to get a substantial return on your RIA. But it is just that, a window. The complication is that many advisors who want to grow their practices and are considering selling to facilitate accomplishing this goal will be very disappointed with the outcomes.
In a survey of 311 RIAs that sold their practices to other firms, including RIA aggregators, 70% sold so they could grow their practices (Exhibit 1). Of the 214 RIAs who sold, half were dissatisfied with the outcomes (Exhibit 2). While the acquirers talk to you about how they have the resources and methods to help you grow your RIA, most fall painfully short when it comes to helping you actually succeed.
Strategies For Growth
There are three principal ways the acquirer can help you grow your RIA:
• Help you increase the efficiency of your RIA
• Provide you with needed technical expertise
• Help you source more and better clients
Mitigating costs is central to increasing efficiency. This usually involves sharing back-office resources and technology. Streamlining certain operations gives you more time for other activities, like serving clients and business development.
While increasing efficiency is valuable, only so much money can be wrung from any RIA’s operations. Furthermore, having more time does not lead to much without a way to grow your clientele. Still, this is an excellent short-term way to boost profitability, but it is limited.
Pro tip: Calculate the cost-saving promised by the acquirer. This is an easy number to reach, and while it is likely to be somewhat inaccurate, you will get a good idea of how you will improve profitability. When doing this calculation, be attentive to the time frame. Concurrently, determine if your freed-up time will translate into growth.
Your ability to deliver exceptional value to wealthier clients often requires access to a broad range of technical expertise. Moreover, regarding the ultra-wealthy, the level of sophistication necessary is not all that common. If you are dealing with such clients or have the opportunity to do so, accessing advanced strategies and wealth management solutions is critical.
For example, most of the wealthiest families in the U.S. use rainy-day funds to protect their wealth and ensure that all taxes are eliminated on the growth of their investment portfolios. If you are working to get ultra-wealthy clients, being able to provide rainy-day funds is essential, but many platforms and RIAs are incapable of doing so.
Pro tip: You must understand the depth and range of technical expertise available from the acquirer. This is not only what they say they can do; you must also know how they do it. For example, to what extent are advanced wealth planning knowledge and capabilities in-house versus outsourced? Also, what are the processes and costs of using the technical expertise?
Advisors' highest-ranking concerns are new clients and increased assets under management. Proven methodologies enable advisors to grow their practices significantly. For example, doubling one's income in 18 months is doable, or at least earning $2 million annually is very possible. There are ways to quadruple client referrals and create a steady stream of new ultra-wealthy clients from accountants and attorneys.
Many acquirers, particularly most aggregators, promote their programs and support systems, claiming to help you grow your business. The complication is that much of what they assert turns out to be vaporware. For example, while many acquirers discuss having a program to help you source high-net-worth clients from centers of influence, only some programs work well, with more than a few working against you. It would be best to have tactical information and a clear understanding of the ongoing support you will be provided.
Pro tip: With business development essential to growing your RIA, first, you need to know how the acquirer will help you excel. Moreover, you need to get into the specifics. You must clearly understand what they will do and what you must do to get your desired results. Understanding and being comfortable with the mechanics is crucial.
Taking Control To Become More Successful When You Sell
Selling your RIA and leveraging your acquirer's capabilities and support services can be brilliant if you ensure you can get the results they “promise.” Critically evaluating what you would get from selling is paramount, but this is not often how advisors decide if and to whom to sell their practices. It is detrimental if you get enticed by well-crafted visions of an abundant future that is simply hype.
The big question you must ask is, “How will selling to this acquirer make me more successful?” Then, you need to listen to the answers carefully. The answers you will likely get will be strategic, such as, “We’ll help you get wealthier client referrals” or “We have the experts that can help you work with super-rich families.”
Hearing answers like this is only a start. You need to push for more information and specifics. Ask the acquirer to break it down tactically, explaining how they will empower you to get wealthier clients or what expertise they can provide to empower you to work with the super-rich.
It is nearly effortless for acquirers to paint a magnificent picture of how great things will be once you sell. While some of their proclamations will never turn out as well as they envision, this is reality. Nevertheless, you must take control from the beginning to get as close as possible to selling your practice to significantly grow it into a reality.
Jerry D. Prince is the director of Integrated Academy, part of Integrated Partners, a leading financial advisor firm. Russ Alan Prince is a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.