Other themes we are seeing that are driving deal volumes are from older advisors who don’t want to exit just yet, they simply want out of their cumbersome back office responsibilities. Carl Mahler of Pinnacle Wealth, a $365 million AUM RIA in Virginia noted that, “In reviewing our succession plan and the evolving wealth management industry, it became clear to us that we needed to partner with a strong national firm that would not only assist with the provisioning of middle and back office responsibilities, but also help us grow while sharing our commitment of putting clients’ needs first.” These types of comments have become more and more typical as to the motivations for this group of sellers.
Additional concerns for sellers of all types continue to be focused on their potential partner. Does the buyer enhance the client value proposition? The status quo isn’t good enough for most firms to meet increasing client demands—clients are looking for more services, and preferably at lower cost. Sellers also want to know that buyers will be able to help them grow so that they can continue to expand their business, as well as agreeing to retain the seller’s staff and provide them with career development opportunities as well. Accordingly, the buyer has to have a stellar reputation and not be a financial engineer seeking to lay people off. Clients want to know that they are going to still be working with “their” Advisor and team.
Older selling shareholders are also typically not looking for an exit strategy (although that cohort as mentioned earlier has been increasing lately). These advisors still want to work for two to five more years after the sale and want to offload back-office responsibilities in order to do more of the things they love, whether that be client service or business development.
A good M&A buyer also has to be a “master problem solver.” Every deal has a score of big issues the buyer must solve. Examples of this include how a seller pays their advisors. Every firm handles advisor compensation differently and seller advisors are not willing to go backward in compensation. The question a “good buyer” has to solve is how is the advisor going to be paid at the new entity, and how can they earn more than they are making today?
A good buyer not only does deep due diligence on the seller, but more and more seller firms are doing reverse due diligence on the buyer. This has accelerated during Covid as in-person meetings have dried up and people must rely on Zoom calls — “trust, but verify” is the order of the day. Sellers now routinely call firms and the people that have joined that firm and ask them their raw, unfiltered opinion of how things went. Because of this, a good buyer must stand by their deal terms. You cannot promise the moon and deliver cheese—integrity matters in all aspects of the process.
These are just a few of the key observations we have garnered that are contributing to the increasing volumes that promise to make 2021, yet again, another record year in RIA M&A deal making.
Dave Barton is vice chairman of Mercer Advisors.