Throughout an advisor’s career, major milestones justify the celebratory popping of top-notch champagne.
Be it the first multi-millionaire client, the first year that managed assets surpass $100 million, or when a multi-advisor team crosses the billion-dollar threshold, a great sense of accomplishment is well deserved.
What to do next, though, is often the hardest part.
While many advisors are content to keep adding clients in a slow and steady organic manner, some want to jumpstart growth by joining forces with a larger firm to leverage growth and derive the benefits of scale. Of course, a decision to sell a practice may simply come down to prudent succession planning.
In the past, a common next step would have been to reach out to nearby planning and wealth management peers to see if they represented a good fit for existing clients.
Yet in the past few years, the decision to merge or sell, already an emotionally fraught question, has become far more complex as a new wave of mega-RIAs with ambitious expansion plans has created a whole new class of industry buyers.
Knowing more about these mega-RIAs, their growth strategies, and most importantly, how they can help serve existing clients, are key factors to understand before acting.
To be sure, many of the new massive RIAs under construction promise to solve a basic set of challenges. They can help a firm monetize (i.e. cash out) after years of building a wealth management practice. Or they can bring in fresh tools to help grow a base of clients, and managed assets.
Focus Financial Partners typifies the new breed of acquisition-driven firms. As part of its investor presentation, the firm lays out a fairly mundane set of reasons for selling your practice to Focus, citing virtues such as “an alignment of values,” an adherence to “fiduciary standards,” ample marketing resources, and “access to strategy.”
Beyond that kind of marketing pablum, Focus and its ilk also offer to take the managerial aspects of running a business off a company’s plate, usually for a hefty slice of cash flows. This kind of basic straightforward approach may be just fine for some advisors.
“You can’t convince someone to be an entrepreneur,” says Louis Diamond, executive vice president at industry recruiter Diamond Consultants. “Not everyone is well-suited to control various aspects such as marketing, technology, social media and office supervision.”
Yet for advisors (and their advisory teams) that instead want to pursue more robust and targeted growth, other massive RIA-focused aggregators offer more specific skill sets to help catalyze growth.
Take Lovell Minnick Partners as an example. The private equity-backed firm has been cobbling together a broad range of financial services firms, not just asset managers, in a bid to create an advanced toolset for advisors at its captive RIA firms.
“We’re fascinated by the recurring themes across financial services, which you cannot identify unless you have a broader lens,” says Brad Armstrong, a partner at the firm. “For example, we see the abundance of data and potential for AI and automation, an evolutionary change that’s playing out in areas beyond just wealth management – we’re also seeing it unfold in specialty finance, asset management, and other sectors within financial services.”
From compliance to fintech to analytics, Lovell Minnick helps provide acquired RIA firms with a very broad ecosystem of tools and a network of relevant contacts for business and corporate development that they may have lacked when they operated independently, says Armstrong.
“We’re heavily invested in our companies’ success and get excited about adding value,” says Armstrong, who adds, “we have over twenty companies pursuing growth strategies; while each has its own mission, we enjoy helping them deploy best practices we see elsewhere in the portfolio. In wealth management, an important toolkit today is the ability to drive an M&A strategy – our companies have made over 80 add-on acquisitions and average more than one a month, so we have the experience base and resources in-house to draw from.”
Along with a growing base of captive RIAs now under the Lovell Minnick umbrella, the firm also owns industry vendors such as Attom Data Solutions, which provides real estate industry analytics, SRS Acquiom, a provider of M&A settlement support, LSQ Funding Group, which offers working capital management tools, and One Zero Financial, which sells foreign exchange trade management software.
Emigrant Partners takes a different approach in support of RIA firms, eschewing traditional buyouts and focusing instead on providing access to growth capital (usually in the form of loans and cash flow participation), along with strategic advice.
Structuring the deals that way brings several key advantages.
“Firms maintain their independence and operating autonomy, and we stay out of their board rooms. These features are important to their founders, next gen and clients,” says Karl Heckenberg, Emigrant Partners’ CEO. Instead, his firm is focused on providing the kind of mentorship that can lead to higher AUM and profits.
As just one example, Emigrant established a partnership with Minneapolis-based NorthRock Partners this past April, and is already helping NorthRock devise strategies to drive rapid growth in high net worth relationships.
Heckenberg says that “North Rock is already on pace to double in size compared to when we first linked up.”
As is the case with Lovell Minnick, Emigrant Partners aims to bring in resources from other divisions to aid its RIA portfolio members’ growth strategies. Heckenberg cites services that can be offered from other subsidiairies at Emigrant Bank such as trust administration, property & casualty advisory, fine art finance, and other specialty lending and advisory capabilities.
Emigrant Partners is a part of New York Private Bank & Trust, which is an atypical industry backer of RIAs. Most of the industry’s growth capital is coming these days from private equity, other RIAs, and in rare cases, investment banks.
New York Private Bank & Trust also operates a separate RIA consolidator under the leadership of Heckenberg, known as Fiduciary Network. RIAs under that umbrella have asset management bases ranging from around $1 billion to $12 billion, with the average holding controlling $3 billion in AUM.
Emigrant Partners, Lovell Minnick Partners and other more selective industry operators share a key common trait: a desire to tap into the high net worth and corporate clients.
Advisors and their teams with such relationships will always be in high demand, says Carolyn Armitage of industry consultant Echelon Partners.
“I’ve seen advisors make an entire career off of one corporate client,” she says, adding that providing planning services to corporate executives, helping with areas such as stock options exercises, can be very lucrative for advisors.
A focus on high net worth clients isn’t the only key criterion for these selective RIA investors. Heckenberg says that his firm looks at 40 to 50 deals per year, and most of them aren’t growing organically.” His firm only looks to invest in firms that are already on the growth fast-track.
For firms like Emigrant, the talent bench at a potential acquisition is also a key consideration. Heckenberg says his firm is “heavily focused on internal succession. We spend as much time with the next gen leadership at the firm as we do with the founders.
Not all firms aim towards the premium client and rapid growth end of the market. Captrust Financial Advisors, for example, has a large defined contribution plan business, which helps advisors open the door for 401(k) relationships to sprout into full planning engagements.
Edelman Financial Engines is now the nation’s largest RIA, thanks to a similar approach that builds out from a core set of retirement plan management offerings.
These firms and other large RIAs are making heavy investments in digital planning technologies to help advisors streamline their processes and carve out more time to spend with clients (or look for new clients).
“Advisors tend to be laggards when it comes to technology,” says Tim Welsh, CEO of industry consultant Nexus Strategy. He adds that “many smaller practices simply lack the resources to spend a lot on technology.”
The good news: Welsh says that “there has been a renaissance in terms of advisor technology, in areas such as Customer Relationship Management (CRM), rebalancing software, tax planning efficiency software and others,” which is helping advisors to become much more efficient.
While Edelman Financial Engines has historically been focused on retirement plan management for the bulk of its asset growth, the firm now sees a growing set of tech tools as a key differentiator for clients as well.
“We want to scale our business on the retail side, using technology to help our advisors handle more clients,” says CEO Larry Raffone.
Indeed, the growing use of technology—by both advisors and clients alike—can be seen as an opportunity to stay on the industry’s vanguard. Millennial clients are especially well-adapted to a tech-driven financial planning approach.
The flip side of that trend is that any advisors with long-standing (and perhaps aging) clients may be ill-equipped to compete for next generation clients if they fail to evolve.
Raffone says his firm will continue to invest in firms that can bring more tech arrows into the quiver.
“We’re always on the lookout for vendors that can expand our digital offerings,” he says.
Even as Edelman Financial Engines has been at the forefront of the robo-advisory trend, he doesn’t consider it a major threat to the industry.
“Robo isn’t a business, it’s a capability,” he says. “For more complicated financial pictures, you still need to have a strong human connection. As far as he’s concerned, “digital services offer a path to create a better client experience, even for older advisors.”
The growing use of digital tools in planning and wealth management is also a defensive measure, as they can lower costs. Raffone cites the growing use of virtual planning as just one example.
“Planning fees are coming down and you can’t spend too much time on face-to-face meetings if you want to efficiently manage your time and your clients’ time,” he notes.
At the risk of oversimplifying the current landscape of large RIAs, we’re entering a bifurcated world in which high net worth-focused firms with ambitious growth plans sit squarely in the crosshairs of the industry’s most selective deal makers.
At the other end are firms that have a mass affluent client base and are looking to simply better mange their platforms and perhaps enable succession plans.
Picking the right investor is critical to a firm’s success. It also will ensure that the bubbly keeps flowing.
David Sterman, CFP, is President of New Paltz, NY-based Huguenot Financial Planning