Anatomy of an RIA Acquistion

Transcription

1 Anatomy of an RIA Acquistion 1

2 Speakers Derek Bruton, EVP, National Sales Manager, IAS, LPL Financial Corporation Jeff Rosenthal, SVP & CMO, Triad Advisors, Inc. Moderator: Philip Palaveev, President, Fusion Advisor Network 2

3 Why RIAs? Fastest growing part of the financial services industry ~ 15,000 firms, ~9,000 SEC registered firms Over $2 billion in AUM Has absorbed many of the best BD firms 25% - 30% of our current firms have their own RIA Over 50% of RIAs once had a broker-dealer but left it Potential to expand our traditional value proposition Provide scale and centralized resources Hub of value added services Our advisors have a keen interest in growing through acquisitions Our largest firms aggressively seek to grow Our largest firms will consider switching channels or BDs if they could help them acquire 3

4 Does it matter that they are RIAs? Does not matter It makes a big difference Similar profile of the advisors\principals Common background they were once with BDs Common culture in many aspects Similar business practices Similar business practices risk RIAs are culturally allergic to BDs Steep resistance from the custodians Introduces the RIA to FINRA rules adding complexity and risk Tangle of economics may frustrate them platform fees, haircuts, different contracts, etc. 4

5 Why Not RIAs? They position, present and think of themselves as the opposite of the BD culture Fiduciary relationship Anti-commission Suspicious of haircuts and platform fees In merger conversations they often end up recruiting BD firms away rather than joining them RIAs have attracted a lot of interest and perhaps too much Over-valued Unreasonable expectations Custodians Compete with BDs and are very protective of their firms Provide many of the same services that are our value proposition Protect their economics and make it difficult for BDs to price their services 5

6 Two Distinct Markets Large Institutional Firms Over $500 million in AUM Multiple owners and depth of talent Employee advisors non-owner, salary compensated, significant role in client relationships Standardized delivery, sophistication, well developed back office Powerful local brand In high demand, premium pricing and multiple buyers vying for the deal Small Practices Under $100 million in AUM One owner of two to three silo practices Small team dependent on the owners Emphasis on personal relationship with clients Needs operation support Economics do not afford a standard deal, deals happen between advisors The gray area - $100 to $500 million in AUM Has elements of both and can change depending on how aggressive buyers get 6

7 Who Is Buying? Before and after aggressive buyers pre-crisis and fewer buyers today Consolidators struggle with profitability and payments due. Have stopped acquiring and have even unwound many deals. Uncertain participation in the market in the future Banks used to be the largest buyer. Balance sheet issues do not allow for acquisitions. May resume activity when healthy CPA firms all of the large firms have established their main subsidiaries but they continue tuck-in mergers Other advisory firms continue to be very active in the merger market. There are many ongoing merger negotiations at every size level 7

8 Broker-Dealer as Acquirers Sanders Morris acquired Edelman Financial Edelman became the main retail advisory platform First Allied and Advanced Equities Advanced equities serves as an investment platform for reps of First Allied Hightower Advisors Not an acquisition model but has some similarities to a merger model NFP and NFP Securities Parent company owns several of the largest RIAs Northwestern Mutual and Frank Russell Potential for distribution through rep network 8

9 Advisors as Acquirers Advisors are looking to grow Intrigued by the ability to buy AUM on an earn-out Unwilling to commit a down payment Struggle with negotiations Selective acquisitions have generated great results High retention of clients and assets Relatively smooth transition of service Good knowledge of the buyer is key Problems arise when the acquired book of business proves to be different than expectations Circumstances when it works Retiring advisors CPA practices selling off their advisory business 9

10 Larger Firms as Acquirers The largest BD firms have aggressive growth goals and are looking to merge smaller RIAs Looking to create internal management capabilities Merging RIAs as partners in the existing firm Often have an RIA of their own Sometimes this becomes a trigger-point for the BD firm to abandon their affiliation 10

11 Who is Selling? 1. Large firms who see a merger as a way to grow faster and obtain new capabilities 2. Large firms who are looking to deal with owner succession and new owner introductions 3. Small firms who are facing succession 4. Small firms who are getting out of the business 5. Small firms who are getting scared Example - $500,000 in fees Take-home per owner is around $300,000 Valuation is around $1 million 5 payments of $200,000 +interest Why sell? Only if advisor does not want to work any-more 11

12 Valuations and Terms Ultimately valuations focus on cash flow of the acquired firm present value of the transferable cash flow stream Transactions have been between 5 7 X EBOC (earnings before owner compensation) The 2 X Revenue rule of thumb has been popular (range of values from 1.8 to 2.2 has been used by FPTransitions) Terms are key Down payment versus contingent payments Types of consideration stock, loans, etc. Tax treatment of the payments Advisors need help with the transactions several firms specialize in this market Valuations seem to have held but payments are heavily skewed to contingent forms of consideration 12

13 How Can You Help Advisors? Education and information Aki Asking the tough questions Why? Does this support your strategy? Is this a good fit? Providing professional advice and transaction support Internal experts Agreements with external consultants Financing? Many broker-dealer do it on a situational basis Risky and unclear how the return will be realized for the BD 13

14 What The Future May Hold? Significant consolidation in the RIA market Owners are uneasy about the future the crisis scared many Desire to belong to a larger and more stable entity Consolidation models will be less aggressive and will change their models Will emphasize the synergy rather than the financial wizardry Advisors will lead the market as acquirers and merger partners We will see some of the larger RIAs compete as feeonly broker-dealers 14

15 Case Study #1 Textbook transaction Seller John W. Buyer Andrew D. Age 56 Age 48 $357,000 revenue $1.2mm revenue $57mm AUM $111mm AUM First time Seller First time Buyer 29 inquiries i i and three offers in 30 days Engaged B/D and counsel early and often Best fit vs. best offer Client retention nearing 96% 15

16 Case Study #2 Textbook Opportunity, Poor Execution Seller Thomas D. Buyer Steve F. Age 66 Age 55 $90mm AUM $125mm AUM Passive investment Passive investment philosophy philosophy Intimidated by growth Motivated by growth Looked good on paper Past experiences were aligned; future plans never laid out Sellers lack of focus on clients killed the deal Clientretention = less than 10% 16

17 Case Study #3 Incorrect Expectations Seller Walt Y. Buyer Dan H. Age 81 Age 48 $200mm AUM $375mm AUM Uses TAMPs, fixed Mutual funds, income separate accounts Perpetual p seller Opportunist Buyer willing to be flexible, but not unrealistic Product mix differences were an obstacle Succession planning was focused on price, not business 3 trips to the altar but no marriage 17

18 Case Study #4 Opposites Attract Seller Vincent C. Buyer Janice W. Age 58 Age 47 $450mm AUM $720mm AUM Skilled portfolio manager Skilled salesperson Fee plus commissions Fee only Riding g into sunset Career peaking Good marriage of strengths Seller coaches, retains then retires Flexible business model is attractive >95% retention plus 15% increase in new business 18

19 Case Study #5 Dating before Marriage Seller Cathy J. Buyer Joseph D. Age 45 Age 55 $275,000 revenue $1.1mm 1 revenue $51mm AUM $90mm AUM Wants to grow, but Looking for a capital is scarce successor Sole practitioner finds continuity partner 50% stake sold over 4 years Synergies achieved lead to larger, more profitable practice Succession planinplace place 19

20 Trends True RIA s moving back to commissions Self Preservation True RIA s moving back to BD s tired of regulatory demands 2010 and Beyond Regulatory Landscape Who Knows? 20

21 RIA to RIA activity Small to Mid size acquisitions Individual and Partner controlled RIAs $15 M - $100 M AUM Hybrid Model Retirement and Business Enhancement 21

22 Tools Provided Internal Matchmaker Education Due Diligence assistance Valuation Guidance it is not always about The Number Risk Mitigation Funding? 22

23 What an Advisor Needs to Consider As a Buyer Type of Practice Culture Client Base Geographical Limits What can I afford Should the present owner remain involved for how long Do I want to keep the staff Technical expertise coming with purchased firm Is my ypricing consistent with the other firms As a Seller Why am I selling What does my ideal buyer look like Time Frame for exit Have I placed a realistic value on my practice What are my deal killers Do I need cash or can I accept financing for the deal What are my alternatives (Partial Sale, Internal Sale) 23

24 Compliance Concerns 1. Record Retention Periods 2. Standard of Care 3. Privacy 4. Licensing 24

25 Compliance Considerations Record Retention Periods differ between BDs and RIAs BDs are required to keep the following records for the stated periods: Six year: records of original entry (blotters), customer account records, financial records, and cash records; Three years: order tickets, guarantees and power of attorney, communications, net capital computations and related records, written agreements, advertising records, bills, and training, supervision and continuing education files; and Permanent: corporate records and fingerprint cards. RIAs are required to keep the following records for the stated t period: Five years: records of original i entry (journals), customer account records, financial records, communications, net capital computations and related records, bills, written agreements, advertising, and powers of attorney; and Three years: corporate records. Privacy Regulation S-P Both BDs and RIAs are held to the same standard with respect to most privacy issues. Noteworthy, is the fact that RIA contracts generally cannot be assigned to another IAR. However, transfer of securities accounts, especially those of RRs of Independent BDs, have become very complicated and burdensome due to Regulation S-P. 25

26 Succession Planning Starting Point get emergency plan in place to enhance value of business at its sale Acquisition planning 26

27 Sample Checklists and Other Tools 27