When Investing In RIA Aggregators Is A Really Bad Idea

RIA aggregators buy up RIAs to monetize a larger RIA. However, adding up assets under management will not necessarily generate a multiple on the monetization event that the RIA aggregators and their financial backers aim for. Based on historical examples of rolling up private wealth industry professionals, aggregators can be severe financial failures.

What is needed is for the RIA aggregator to be far more profitable than an entity that just combines the profits of the individual RIAs and mitigating some expenses by:

• Sharing back-office support.
• Using the same investment platform.
• Extracting other operational costs by combining different RIAs.

A powerful way to make aggregators more profitable is to help the acquired RIAs increase assets under management and generate new profits from other financial strategies and products. This does not discount the need for cost savings and efficiencies. However, there is only so much an RIA aggregator can wring out of a mid-sized advisory firm. Organic growth is required for any seriously profitable exit, especially considering the multiples paid for RIAs. At many advisory firms and teams, internally generated growth has been a serious problem.

Organic growth comes in several forms:

• Increased assets under management because of portfolio and market increases.
• More business with current clients.
• New client acquisition.

Investment expertise clearly is core to wealth management. For clients, wealth managers, and RIA aggregators, portfolio growth is “expected.” With much organic growth determined by markets and out of the control of many wealth managers and RIA aggregators , the focus must be on more business with current clients and acquiring new clients.

RIAs Selling For Growth
In a survey of 311 RIAs that sold their practices to other firms, including RIA aggregators, 70% sold so they could grow their practices. Of the 214 RIAs who sold, half were dissatisfied with the outcomes.

For an extensive discussion of RIAs selling their practices, see: Half of RIAs are Dissatisfied with the M&A Deals.

What are the implications for RIA aggregators if the RIAs they acquire are dissatisfied with their arrangement because the deal falls short of their expectations of generating new growth? While the dissatisfied RIAs surveyed were not all acquired by RIA aggregators, their responses show what can go wrong (Exhibit 1).

N = 109 RIAs

Nearly 80% will likely conflict with the executives running the acquirer. When they are unhappy, they are going to share their discontent, usually with the intent of correcting the problems. It would be fantastic if the RIA aggregator could help them meet growth expectations, but it isn't so easy. Otherwise, there are complications, as 65% will probably want to leave the RIA aggregator as soon as possible. While they might not be permitted to take clients with them, sometimes things do not work out that way. One in five said they would decrease their efforts, likely making the acquisition underperform. 

Remember, these are extrapolations from a small sample size. Still, they provide insights into when investing in RIA aggregators is a bad idea. Even decreasing costs, without organic growth, it will be tough for RIA aggregators to justify lofty multiples unless they acquire quality RIAs at bargain basement prices, which is not happening.

Generating Organic Growth
For RIA aggregators, creating efficiencies and reducing expenses is valuable. Still, discounting the greater fool investment strategy, RIA aggregators must find ways for their acquisitions to grow to get a good return. Therefore, RIA aggregators must support organic growth. This is sometimes done with financial incentives, but that has been shown to have significant limitations. Consequently, providing the means for RIAs to do more business with current clients and bring in new clients translates into substantial success.

RIA aggregators can help RIAs grow in various ways. Exhibit 4 identifies a few of them that meet the actionable criteria RIAs want.

Exhibit 2: Generating Organic Growth

Critically, the support RIA aggregators must deliver is tactical. There must be a clear roadmap for RIAs to follow that translates into more business. For example, almost every RIA is familiar with the Great Wealth Transfer occurring now, which will continue for years. Knowing about this macro trend is meaningless unless RIAs know how to benefit from it. Another example is helping RIAs work more effectively with different wealthy cohorts like the philanthropic affluent.

According to Brett VanBortel, Director of Development and Delivery with Invesco Global Consulting, “Aggregators need research-based, field-proven methods to generate organic growth, triggering referrals from clients, greater business per clients, and going upmarket thru COI referrals. Many of the supposed strategies drifting through the industry are anecdotal and ineffective, and when executives get behind these roads to nowhere, their advisor’s confidence and growth withers.”

More standard and relatively meaningless advice tells RIAs to ask for client referrals. This is a good start, but only a start to acquiring more clients. Also, most sales ideas around this topic have been proven useless, if not counterproductive. Understanding the narratives that most effectively transition prospects to clients appeals to RIAs. Another example is providing the acquired RIAs with a comprehensive 3-step process that can enable them to quadruple the number of high-quality client referrals over the previous year’s results.

A truism in the private wealth industry is that professionals who build strategic relationships with other non-competing professionals build the most successful practices. Saying RIAs who develop strategic relationships with centers of influence such as accountants and attorneys can lead to a steady stream of new clients does not mean very much. RIAs are looking for a proven methodology to build those strategic relationships. Regurgitating sales ideas to share with accountants and attorneys will occasionally lead to a referral from them. On the other hand, knowing how to operationalize the best approach to getting accountant referrals is very powerful, as is knowing how to add value to T&E attorneys, resulting in a steady stream of wealthy client referrals.

When Investing In Aggregators May Be An Excellent Idea
Organic growth is in the low single digits throughout the wealth management industry. RIA aggregators and the firms backing them are paying well for RIAs and, therefore, need to make them substantially more profitable to exit successfully. Only so much can be done to lower expenses; these actions alone are unlikely to make exits very profitable unless a greater fool is found.

Organic growth is essential for RIA aggregators and their backers to “hit their numbers,” making many unprofitable investments. While generating organic growth is not that hard, it eludes many RIAs. RIA aggregators prioritizing organic growth by supplying proven tactical business development solutions to their acquired firms and doing other things well, such as buying smartly and managing expenses wisely, will likely be excellent investments.

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.