Advisor – Deal Flow, Partnerships, Succession Plans, and Sustainability.

By David McNeal, Contributor of My Compliance Blog 

By Cory Roberson, Principal of FIN Compliance, Lancer, Ventures

Financial adviser planning for the future begins today

September 26, 2019.  For financial advisors looking to sell their practice, many challenges exist in getting the best possible deal when it comes down to financing.   Historically, traditional bank lenders were unwilling to provide the type of financing needed to help close those kinds of deals.   

Traditionally, some barriers toward funding the practice lied in a firm’s current cash flow and strength of their customer interactions versus the preferred assessment of collateral of accounts payable, real estate, tangible assets, and other kinds of existing business loans.

Practice management is important.

How a practice is managed can be a determining factor of a lenders interest in making a deal with a firm.  Independent advisors (firms without a network or succession partners) are much less likely to be of interest for lenders that are evaluating the deals.  Additionally, if the majority of a firms’ clients are ready to retire or already retired, the advisor may have another problem.

Nowadays, banks are looking for sound practices that consists of a client base of younger investors that are seeking asset growth.  

If most of the clients in the practice are the same age as the principal advisor or older, banks will likely raise a red flag as this demographic begins its anticipated retirement distribution process of shrinking the assets under management on an annual basis.  Firms can address some of these asset continuity issues by reaching out to its clients’ younger heirs. 

Some firms, with aging clients, may benefit by partnering with young firms (or advisors) in the future. The younger cohort would benefit from a stable client base/cash flow and older firms with a succession mechanism that can demonstrate a measure of sustainability for a financing partner.

Meanwhile, buyers are better positioned to select a financing partner when setting up a strategy for the deal flow.  Prior to funding, in many cases, lenders request tax returns for up to four to five previous years.  This provides the buyer with an idea of how the practice will perform in both up and down markets.

A report by ECHOLON offers a detailed benchmark to current market conditions:

A Blockbuster First Quarter for Deal Making:

The 49 deals occurring in Q1 2019 was the highest quarterly count since ECHELON began tracking this data. The trend indicates another record-breaking year for M&A transactions in the Wealth Management arena.

RIA-to-RIA Transactions Surge to the Forefront:

RIAs were responsible for 17 acquisitions in Q1 2019, which was 35% of total transactions. If this market share continues in 2019, RIAs would-be buyers in 69 deals which would be a 41% increase over 2018 levels.

Average Deal Size Decreases:

The return of RIA-to-RIA transactions resulted in lower average AUM transacted per deal, which was 13% lower than 2018 levels. With that said, average AUM transacted remains above $1 BN.

Focus leads Consolidators Out of the Blocks:

With the announcement of 11 transactions in Q1 2019 (both platform and add-on acquisitions), Focus Financial tallied their highest quarterly deal count to date.  Focus accounted for 22% of total deal volume.

RIA Breakaways See Precipitous Fall as Advisors Stay Put:

Q1 2019 saw activity decrease 36% relative to Q4 2018, with 94 breakaways.  Improved advisor retention programs at wirehouses and a volatile market backdrop are leading to a more risk-averse advisor-based strategies.

Two themes boosted this category;

(1) Independent Broker-Dealers and their increased efforts related to inorganic growth strategies, and

(2) Direct Private Equity Transactions.

Independent Broker-Dealers

Broker-dealers or custodians may be the first place to look for a deal-flow financing partner.

Dealers and custodians have a vested interest in keeping assets on their books. Providing financing for deals involving their existing adviser relationships is a small price to pay to preserve their balance sheets.

This group has turned to M&A to reach a heightened scale as margins continue to trend lower while Private Equity sponsors continue to target the Wealth Management industry given relatively higher growth rates than other sectors.

RIAs:

This group was responsible for 35% of RIA transactions in Q1 2019, completing 17 operations. These transactions tend to be smaller as measured by Average AUM per M&A deal than other categories.  

Strategic Buyers or Consolidators. In 2018, these buyers accounted for 47% of wealth management transactions with a deal count of 85, doubling the total deals of 2014, when they were involved in 34 transactions. Q1 2019 saw their level of activity remain at heightened levels at 37% of transactions or 18 deals. This quarter was dominated by Focus Financial, who was responsible for 11 sales, 61% of all deals announced by this category.

It is worth noting that the constituents of the group are not all rollup firms.

Instead, it primarily represents firms that

a) already have a platform,

b) have considerable financial resources, and

c) have done more than a few M&A transactions.

Banks:

Once the largest buyers of RIAs, banks have been on the bottom of the charts since 2012.

Q1 2019 saw minimal action in this category, with Banks accounting for 4% of total deal volume.

The largest Bank transaction observed was Provident Bank's purchase of Tirschwell & Loewy ($750 MM), which did not break into the top 10 M&A Transactions of Q1 2019.

Several factors are contributing to the rapidly growing prominence of RIA-RIA deals.

RIAs are looking to acquire to achieve scale and efficiency gains. Many have the support of a parent owner or private equity investors contributing investment capital as well as expertise.

Further, a group of RIAs is now emerging as seasoned acquirers or multi-dealers. They have experienced the benefits that can be achieved through a transaction and have an increasing desire, confidence, and the financial means to carry out more of them.

Transactions initiated by multiple acquirers, including RIAs as well as investor multi-dealers, have never played a more prominent role than in 2018. Six different acquirers announced four or more transactions in 2018. Together these six accounted for 38% of the year's total deals.

Before 2018, no more than three acquirers had ever announced four or more transactions in a single year.

Year to date in 2019

There have been 75 RIA transactions representing $86.1B in assets and 7 IBD transactions representing $392.0B in assets.

Compared to the same period last year, the number of RIA transactions went up by 44%, and the number of assets transacted went up by 68%.   In the IBD channel, the number of sales went up by 40%, and the number of assets transacted went down 1%.

The 7 RIA transactions that occurred in July match the seven that occurred during July 2018 in number but represent more than double the AUM.  RIA transactions for the month totaled $16.5B, which is up 164% from the same period last year.

The month's AUM total is mostly due to the purchase of Wealth Enhancement Group by private equity firm TA Associates from Lightyear Capital Partners. The deal may position Wealth Enhancement Group to accelerate their M&A activity even further. TA Associates is Lightyear Capital's fourth private equity partner, so the agreement also represents a trend towards recapitalization.

Advisor Group's sale from Lightyear Capital to Reverence Capital Partners in May is another example of recapitalization, which can be expected to continue as the importance of private equity capital in wealth management M&A grows.

Other notable activity included deals by minority investor Wealth Partners Capital Group, which completed two transactions within two of their three acquired firms, MAI Capital Management, and EP Wealth Advisors. During July, one IBD transaction was announced representing $1.0B AUA.

It is crucial for selling advisors to have a plan regarding the financing of the deal.  Failure to plan appropriately for this aspect of the sale can dramatically impact the result and ultimately lead to an unsatisfactory result.

Succession Planning/Transition and, Partner Matchmaking Services

We are pleased to announce a new deal flow service that includes transition planning, deal flow, and partnership referrals. We will have more information available as our offering develops.  Both older and new advisors alike can begin to prepare for changes in the industry.  It’s a good time to evaluate opportunities whether you are a young firm looking to buy a book of business or an older advisor looking to establish an exit for retirement. 

For firms interested, we are offering a matchmaking service to connect older and new firms together for deal flow, succession planning, partnerships, and more.   Referrals are available for financial deals as well.

Compliance/Business Management Systems

About FIN Compliance 

FIN Compliance (FinCompliance.io) is a consortium of compliance services including: RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management software tool, FIN Ventures, providing business/startup strategies, and FINLancer, a business management portal featuring:  E-signature tools; Invoicing integration, Vendor Directory, continuity directory*, business client document portal, and more (available by Q4 2019).  

Access all services on one site: FINCompliance.io.

Review our brochure here

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Compliance Management System: for internal review process.
Business Management System: for Project/Task Delegation, Business/Firm Directory, E-contracts, workflows, and more 

Succession Planning/Transition and, Partner Matchmaking Services

We are pleased to announce a new deal flow service that includes transition planning, deal flow, and partnerships. We will have more information available as our offering develops.  Both older and new advisors alike can begin to prepare for changes in the industry.  It’s a good time to evaluate opportunities whether you are a young firm looking to buy a book of business or an older advisor looking to establish an exit for retirement.  For firms interested, we are offering a matchmaking service to connect older and new firms together for deal flow, succession planning, partnerships, and more.  

Email Us to schedule a brief session to review needs

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Impact

FIN Missions (FINmissions.com) provides business support group sessions for other entrepreneurs.  In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.