Most advisors initially build their businesses organically, one prospective client at a time, through networking to establish personal relationships that lead to referrals (and then getting clients who can provide even more referrals). And as the number of clients grows, so too does the staffing of the firm to support and service them. Until eventually, the firm has enough infrastructure that it becomes appealing to not just get new clients one at a time, but to grow inorganically by acquiring an(other) advisor's entire client base.
Accordingly, in this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at how advisors who want to buy can actually find an advisory firm available for sale. From the buyer's perspective, where do you go to find the sellers?
Unfortunately, the reality is that finding sellers is difficult, because there actually aren't very many. One advisor marketplace estimates there are as many as 50 buyers for every seller, as growing firms have grown a hunger to acquire far faster than the number of baby boomer advisors have decided they're ready to sell.
As a result, advisors looking to acquire can check out "marketplaces" like FP Transitions, RIA Match, and Succession Link, but must face a significant amount of competition from other buyers. For some, the more appealing alternative is to look for potential sellers amongst an existing group of colleagues, such as fellow advisors in your association membership group, broker-dealer, or custodian.
In fact, because an advisory firm acquisition won't go well (or won't happen at all) unless there is a good philosophical and cultural alignment between the buyer and seller - crucial to ensuring clients get the service they expect in order to retain - often the best place to look for potential acquisitions is amongst a group of existing colleagues, whether that's via a common broker-dealer, custodian, or association. On the other hand, for those looking to acquire locally, the best option is often just to do the leg work necessary to aggressively network locally, where there may be far less competition with other buyers!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone. Welcome to Office Hours with Michael Kitces. Or, as you can see from the background here today -- Airport Hours with Michael Kitces!
This week I want to talk about buying advisory firms.
Chuck sent me the question for this week:
How do I find practices in my area that want to be purchased? I'm a buyer. How do I find the sellers?
Growing Advisory Firms Have Capacity To Buy Others [Time - :37]
There's been a huge increase in interest on buying advisory firms over the past couple of years. I think it's really driven by two things.
One, firms are getting larger. We have some of the best data on it in the RIA community. If you look at the RIA benchmarking studies, about 15 years ago the average advisory firm had $20 million under management. By around 2008, it had $100 million under management. By 2014 or so, we're up to $200 million under management for the average independent RIA in the study.
As advisory firms grow bigger, an interesting thing happens: firm infraustructure. To go from $20 million to $100 million, you inevitably have to grow beyond just the single solo practitioner owner. You may hire an associate advisor, some other support staff, and you being to create business infrastructure. Then as the firm grows from $100 million to $200 million, it often includes the introduction of the new partner, additional advisors and staff are added to the firm, and the business infrastructure grows further. Operationally, the advisory business begins to find at least some economies of scale.
And so as the firms get bigger... and build more infrastructure... eventually, every firm gets to the same point. The owners say "Jeez, it would be really easy to add more advisors because I've already got all the infrastructure. Let's go acquire some other advisory firms."
Thus, as the average firm grows larger, more and more have been going in this direction, saying, "Hey, we built all the infrastructure. Let's go and find advisors to leverage it." The larger the firm, the more the infrastructure, and the more they seem to be interested. Firms that have a couple hundred million dollars under maangement are interested. Billion dollar firms are even more interested. Our own Pinnacle Advisory Group has done three acquisitions in the past four years for the same reason. And I'm seeing more and more interest in acquisitions across the spectrum.
Organic Growth Rates Are Slowing Down? [Time - 2:23]
So the number one reason that more firms are looking to acquire is because, as they get larger, they're more capable of doing the acquisitions because they've built the staff and the infrastructure already. But there's a second effect that goes along with this trend as well: our organic growth rates may be slowing. If you look at all advisory firms in the aggregate, and you strip out the market growth and just look at actual organic growth (i.e., net flows), advisory firm growth seems to be slowing.
I suspect this is driven in part by the simple fact that there aren't as many unattached clients now, as there were in the past. I see this in our own firm. Our approach talks with prospects years ago would be us, a product salesperson at a broker-dealer, and the prospect's brother-in-law who sells life insurance and "sort of" gives advice on the side. So it would be us as true adivsors, against some folks that were more product based. We had a full-on advice offering, and we won most of the client business.
Now, when we go out there it's typically us, and several other firms in our area who do advice as well, firms I know and I respect, and I don't have anything negative to say about them. I might point out "Well, we're a little different because we do advice this way, and they do it that way." There are some minor differences. But we've gotten so similar to each other...and the clients are better at seeking out and identifying real advisors, too. Or, even worse, the client is already working with another advisor. So we're not just trying to peel away clients from a salesperson who doesn't give advice. We're trying to get clients to switch away from actual advisors. Which is a much harder to do.
And so there are just a few clients available, exacerbated by this crisis of differentiation where we're all trying to do the same thing for the same group of people as well. And so as the firms get larger, but the organic growth rates slow down, and you're looking at all this infrastructure to be able to acquire firms instead... it's not long before the firm owner says "You know, it'd be easier to buy a firm at $20 million, or $50 million, or $100 million at a time, than just trying to get new assets one client at a time! Let's go find a firm to buy!"
It's a Seller's Market With 50 Buyers For Every Retiring Advisor! [Time - 4:29]
This combination of factors has led to some interesting shifts in the industry.
The prediction for a long time was that we'd have this giant wave of baby boomer advisors, all approaching retirement, who would begin to sell their firms en masse. A point we "should have" reached already, as the average age of advisors is mid-50s or so, and early baby boomers advisors are already well into their 60s.
Instead, though, what we're finding when we look at platforms like FP Transitions, one of the biggest marketplaces for advisors, is that when a seller lists on their platform, they get 50 buyers interested for every seller -- a 50:1 ratio! So in theory, we're supposed to have the selling wave and it should be a buyer's market. In reality, though, it's a sellers market! You're a very popular date if you're actually selling, right now! Overwhelming number of buyers. Very, very few sellers.
I strongly suspect the lack of sellers is because we're all discovering that financial advising is one of those businesses where you can "die with your boots on", like a cowboy that just keeps on riding until the very end. Because financial advising, frankly, it's not a very intense manual-labor kind of business. As long as the brain still is functioning and you like having relationships, it's a very rewarding business. It's rewarding, personally. It's rewarding, financially.
In fact, given what firms get paid to sell, particularly for a solo practice, the reality for most firms is, you will have more take-home pay in the next three years by keeping your practice than selling it. And if you do that, not only do you get the three years of income that's worth more, but three years from now, you still own the business, so you can sell it then! Except of course, you get three years out, and then the math is still the same. It's still worth more to stay yet another three years than to sell it. And you keep repeating that, and you never leave. And so the giant retirement wave of advisors and the anticipated advisor succession crisis has just turned out to be a mirage.
Now, perhaps as advisors keep getting older and older, eventually the age wave will start to show up. There's some discussion of whether the DoL fiduciary rule may be a catalyst for advisors selling their firms. Although, frankly, the firms that would be selling in response to DoL fiduciary are the very product-centric, transaction-oriented firms. They're not the firms you actually want to buy as an advisor! Maybe if you can get them on the cheap and teach these clients about real advice, that's great. But still, the advisors most likely to be pushed out by DoL fiduciary are the ones that are the least advice-centric, which at best is a risky transaction for an advice-centric firm.
Start with a Matching Platform Of Investment Advisors For Sale [Time - 6:39]
So given this dynamic, with a horribly unbalanced marketplace in favor of the sellers, where do you go to find those sellers if you're a buyer?
You can start with a couple of platforms businesses that have been trying to specifically serve this space. The biggest one, at least that I'm aware of, is FP Transitions. There are a couple others in this area too -- like RIA Match and Succession Link -- that have also tried to function as a marketplace platform pairing together buyers and sellers, both for brokers and registered investment advisors for sale.
Now, still the challenge to this is still that the buyers overwhelm the sellers. And since the buyers know about these marketplaces... they may actually be the most crowded places that get the most buyer inquiries for every seller, because it concentrates the buyer activity. There still aren't many marketplaces available, so the buyers concentrate on the few platforms available.
Still, it's an option you should be aware of. You might still find an opportunity that happens to be the right and perfect fit for you.
Look at Your Own Platform to be Matchmaker [Time - 7:25]
Option number two is to look on your own advisory platform. So whether you're an RIA at a custodian, or a registered rep at a broker-dealer, look to your own platform for buying opportunities. Most of the broker-dealer and custodian platforms have created their own internal marketplace to buy other brokers or registered investment advisors for sale. Some promote them more effectively than others, but almost all of them are trying to facilitate some kind of marketplace matching.
Because they want to be a matchmaker. And they'll often make it easier to transition within the platform as well -- for instance, if you buy the firm you don't have to repaper the accounts in the same way, you just have to change rep codes. So it's easier to do the transition, which means the clients are more likely to retain, so the deal has more economic value.
And the platforms want to support this because if you're a platform, and you see a bunch of your advisors about to retire, as a platform you can either facilitate internal introductions, or you can watch the clients and the assets leave when the person ends up selling to an advisor outside the community! In other words, the custodians and broker-dealers have their own financial self-interest to see these transitions happen internally. So they try to act as matchmakers, as best they can.
In addition, you can go to your own broker-dealer or custodian conferences and see who's there that might be interested in selling? After all, imagine it from the seller's perspective, if you wanted to sell and you wanted to find good buyers, where would you go? You'd go where your peers are, right? You'd go to those broker-dealer or custodian conferences. Especially since the math is so in your favor as a seller. This makes men trying to date at bars look favorable by comparison, that's a mismatch of men and women, but it's even more unbalanced when it comes to advisory firm buyers versus sellers! As a seller there's a lot of opportunity to find someone in going to a conference, so as a buyer try to imagine where the seller would go, and try to be there.
Network Your Way To Finding An Investment Advisory Firm For Sale [Time - 9:06]
Because the advisor marketplaces are so buyer-centric, I think realistically, most advisors that are going to find the best deals by networking locally, particularly if you're looking to buy a firm locally. And that's a good old "boots on the ground, beat the streets" networking kind of effort. I don't know that there's any magic formula to shortcut it.
Again though, remember that if you're local and want to sell... how would you find your local buyers? Maybe you go to local FPA Chapter meeting, or to NAPFA study groups, or to IMCA regional events? So as the buyer, you go to the associations that tend to concentrate common advisors together, and look there. Ideally, you want the events that are not too multi-disciplinary, since there won't be advisory firm sellers there! You may also want to network with some of your own peers and colleagues, even outside the associations, just to build the local word of mouth effect. Who do you know who's looking to buy? Who do you know who's looking to sell? If you have enough of those conversations, you may get a match, or at least an introduction.
So it's not the most elegant or efficient of networking processes, but that's just the reality. If you want to be a buyer in the marketplace where there's 50 buyers for every seller, you're going to have to do some ground hustle if you really want to get a deal done. The deals aren't likely to fall into your lap when there are so many other buyers hustling for opportunities as well.
Make Sure The Philosophy And Culture Really Fit [Time - 10:13]
One other reason why I think it's a particularly good opportunity to look within these 'common advisor' groups -- such as FPA members looking for fellow FPA members, NAPFA members looking for fellow NAPFA members, broker-dealer folks look for people within their broker-dealer, and ditto for the custodians -- is that it increases the likelihood that you get a good philosophical and cultural fit.
Because the reality is, it's extremely hard for an advisory firm's clients to transition well if there's not really a good philosophical and cultural match. If an investment-centric firm gets bought by a planning-centric firm, they try to roll out planning, and the investment-centric clients say, "What the heck is all this? We're here for the returns." It's not a good match. And ditto for the vice versa scenario too. If a planning-centric firm gets bought by an investment-centric advisor, the client are going to leave when they realize they're not getting financial planning service anymore. Similarly, product-centric firms aren't a good match if you're on the AUM model. And if you're an active firm, don't go buy a DFA firm. If you're a DFA firm, you're going to want another DFA firm to buy you, because that's a good philosophical fit for the clients that will make them want to stick around.
Because ultimately, the clients are really the ones in control. If the clients aren't happy with the match, the clients will leave. If the clients will leave, the seller loses money, and/or the buyer loses money, depending on how the deal was structured. But everybody loses out. And if there's uncertainty about the fit, the deal is going to get priced lower to begin with, because there's more retention risk.
So those philosophical and cultural matches are crucial, which again is why I think looking to those association groups, platforms, whatever it is, wherever your nexus of common advisors is in the first place... that's the best place to look for sellers. It's still going to be a crowded marketplace, but at least you're maximizing the odds that if you do find a match, it'll be a good fit.
Accordingly, the challenge if you go to a larger marketplace like FP Transitions -- I have nothing against them, but there are so many buyers coming from so many different angles, a lot of the time is spent just filtering to find the match. You may find a match if you're shopping there as a buyer, if you found the right seller who says, "You, Mr. Buyer, you are the exact perfect fit for me." But that's a hard matching process. There may be a lot of wasted courtship time for what turn out to be bad matches. If you start in a pool of advisors that are more similar to you in the first place, I think you're more likely to find fit, and spend less time doing inefficient due diligence dating for bad matches.
Are Custodial Relationships Crucial To A Smooth RIA Purchase? [Time - 12:39]
Phil [from Periscope] asks a good question:
[What is the] Importance of custodial relationships with buyouts?
On the RIA side for those who use custodians, I have to admit, I don't think it's a huge deal killer to have different custodians. It can be done. Certainly, when you look at it from the perspective of clients, repapering all the accounts and doing all the transfers is certainly a pain, and thus increases the risk of client attrition. So if cross-platform increases the risk that clients won't transition, it's easier to try to find someone on your existing custodian platform.
Alternatively though, what I've seen many firms do is... if you're a Schwab firm and you acquire someone on the TDA platform, now you're a Schwab and TDA firm. The firm actually expands its custodial footprint, using the acquisition as a reason or an excuse. Because if you're sizable enough to where you've got some staff and infrastructure, people you can cross-train on different custodial systems, adding the acquired firm's new custodian is not necessarily a deal killer.
Now if you're an advisory firm with just a few staff, or you're running solo with a very lean virtual staff, learning multiple custodians or running multiple custodial relationships at once is a painful inefficiency for the business, and probably something to avoid. But at a certain size, perhaps $200 or $300 million under management, with the associated staff infrastructure, I've seen more firms at least starting to look at being multi-custodial. At half billion-plus, I see it more and more commonly.
So sometimes the acquisition is the entree into being multi-custodial in the first place. I don't know that that's a great virtue, as it can introduce some operational inefficiencies. But I know a few firms that like it because they can play the custodians off of each other. They go to Schwab and say, "Here's the deal that TD Ameritrade is getting me." And then they go to TD Ameritrade and say, "Here's the deal that Schwab is giving me." And from the independent advisor perspective, the ability to play your vendors off of each other... maybe there's a little bit of negotiating leverage. On the other hand, in the RIA custodial world, there's also the leverage of just getting better service teams and more access to the decision-makers by being a larger firm on that platform. If you spread your assets amongst multiple platforms, you're a smaller fish in everybody's pond, rather than a big fish in one pond. So weigh your options accordingly. Ultimately, the challenges of single custodian versus multi-custodian is probably a discussion into itself.
But getting back to your original question, Phil... No, I don't think it's a deal-killer looking to acquire another advisor on another custodian platform. But I think there's no question it's easier, just mechanically easier, to close the deal and transition the clients, which improves retention and the economic value, if you can find someone on your existing custodian platform. Or at least, if you're willing to expand into the platform where the acquired firm was (and thus will continue to be). Minimizing client disruption is a good thing for client retention, which is a good thing for the value of an acquisition for both the buyer and the seller.
So with that, I think we'll go ahead and wrap up today. Thank for hanging out with me for Office Hours with Michael Kitces...or, Airport Hours with Michael Kitces this month! We try for 1:00 P.M. East Coast time every Tuesday. We've missed that out for a couple weeks, unfortunately, with my travel schedule. But we'll get back onto that regular agenda, soon. In the meantime, you can follow me on Twitter and here on Periscope so you can get the real-time update for when we're broadcasting. I hope this is helpful food for thought. And have a great day, everyone. Take care!
So what do you think? Have you ever acquired an advisory firm? How did you find the firm that you bought? Or if you're sold your advisory firm, how did you find the buyer (or how did the buyer find you)?