Anatomy of an RIA Acquisition

8/4/2019 Anatomy of an RIA Acquisition

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Anatomy of an RIA Acquistion

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Derek Bruton, EVP, National Sales Manager,IAS, LPL Financial Corporation

Jeff Rosenthal, SVP & CMO, Triad Advisors, Inc. Moderator: Philip Palaveev, President, Fusion

Advisor Network

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Fastest growing part of the financial services industry

~ ~, , ,

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

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acquire


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Does not matter It makes a big difference

Similar profile of theadvisors\principals

Common background they

RIAs are culturally allergic toBDs

Steep resistance from thewere once w s

Common culture in manyaspects

cus o ans

Introduces the RIA to FINRArules adding complexity and

Tangle of economics mayfrustrate them platform fees,haircuts, different contracts,

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etc.


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They position, present and think of themselves as the opposite

of the BD culture Fiduciary relationship

Anti-commission

Suspicious of haircuts and platform fees

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

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Protect their economics and make it difficult for BDs to price their services


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Large Institutional Firms Over $500 million in AUM

Multiple owners and depth of talent

Employee advisors non-owner, salary compensated, significant role in clientrelationships

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

ma eam epen en on e owners Emphasis on personal relationship with clients

Needs operation support

Economics do not afford a standard deal, deals happen between advisors

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The gray area - $100 to $500 million in AUM Has elements of both and can change depending on how aggressive buyers get


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Who Is Buying?

Before and after a ressive bu ers re-crisis and

fewer buyers today Consolidators struggle with profitability and payments due. Have

sto ed ac uirin and have even unwound man deals. Uncertainparticipation 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 mainsubsidiaries but they continue tuck-in mergers

Other advisory firms continue to be very active in the merger market.

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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

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Advisors are looking to grow

Intri ued b the abilit to bu AUM on an earn-out

Unwilling to commit a down payment

Struggle with negotiations

High retention of clients and assets

Relatively smooth transition of service

Good knowled e of the bu er is ke Problems arise when the acquired book of business proves to be different

than expectations

Circumstances when it works

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Retiring advisors

CPA practices selling off their advisory business


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The largest BD firms have aggressive growth goals and arelooking 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

a an on e r a a on

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1. Large firms who see a merger as Example - $500,000 in fees

a way to grow faster and obtainnew capabilities

2. Large firms who are looking to

Take-home per owner isaround $300,000

Valuation is around $1 million

new owner introductions

3. Small firms who are facingsuccession

5 payments of $200,000+interest

4. Small firms who are getting out ofthe business

5. Small firms who are getting

y se Only if advisor does not want

to work any-more

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scared


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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 ownercompensation)

The 2 X Revenue rule of thumb has been popular (range of values from 1.8 to2.2 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 thismarket

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forms of consideration


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Education and information

s ng e oug ques ons

Why?

Does this support your strategy?

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

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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

change their models Will emphasize the synergy rather than the financial wizardry

partners

We will see some of the larger RIAs compete as fee-

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only broker-dealers


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CaseStudy#1 Textbooktransaction

Seller

John

W. Buyer

Andrew

D.

A e 56 A e 48

$357,000revenue

$57mmAUM

FirsttimeSeller

$1.2mmrevenue

$111mmAUM

FirsttimeBuyer

nqu r es

an

t ree

o ers

n

aysEngagedB/Dandcounselearlyandoften

Bestfitvs.bestoffer

Clientretentionnearin 96%

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CaseStudy#2 TextbookOpportunity,PoorExecution

Seller

Thomas

D. Buyer

Steve

F.

Age55Age66

mm

Passiveinvestment

philosophy

Motivatedbygrowth

mm

Passiveinvestment

philosophy

Intimidatedbygrowth

Lookedgoodonpaper

Pastexperienceswerealigned;futureplansnever

laidout

Sellerslackoffocusonclientskilledthedeal

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CaseStudy#3 IncorrectExpectations

Seller

Walt

Y. Buyer

Dan

H.

Age48Age81

mm

Mutualfunds,

separateaccounts

Opportunist

mm

UsesTAMPs,fixed

income

Perpetualseller

Buyerwillingtobeflexible,butnotunrealistic

ProductmixdifferenceswereanobstacleSuccessionplanningwasfocusedonprice,not

business

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CaseStudy#4 OppositesAttract

Seller

Vincent

C. Buyer

Janice

W.

Age47Age58

mm

Skilledsalesperson

Feeonly

Careerpeaking

mm

Skilledportfoliomanager

Feepluscommissions

Ridingintosunset

Goodmarriageofstrengths

Sellercoaches,retainsthenretiresFlexiblebusinessmodelisattractive

>95%retentionplus15%increaseinnew

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CaseStudy#5 DatingbeforeMarriage

Seller

Cathy

J. Buyer

Joseph

D.

Age55Age45

. mmrevenue

$90mmAUM

Lookingfora

successor

, revenue

$51mmAUM

Wantstogrow,but

capitalisscarce

Solepractitionerfindscontinuitypartner

50%stakesoldover4yearsSynergiesachievedleadtolarger,moreprofitable

practice

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Trends

2008 2009 True RIAs moving back to

2008 2009 True RIAs moving back to BDs

2010 and Beyond Regulatory Landscape Wh Kn w ?

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RIA RIA ivi

Small to Mid size acquisitions

Individual and Partner controlled RIAs

$15 M - $100 M AUM Hybrid Model

Retirement and Business Enhancement

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Internal Matchmaker

Education

Due Dili ence assistance Valuation Guidance it is not always about The

Number

Risk Mitigation

Fundin ?

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As a Buyer

As a Seller

Client Base

Geographical Limits

What does my ideal buyer looklike

Time Frame for exit

Should the present owner remaininvolved for how long

Do I want to kee the staff

Have I placed a realistic value onmy practice

What are my deal killers

Technical expertise coming withpurchased firm

Is m ricin consistent with the

Do I need cash or can I acceptfinancing for the deal

What are my alternatives (Partial

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other firms a e, n erna a e


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1. Record Retention Periods

2. Standard of Care

3. Privacy4. Licensing

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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: ordertickets, guarantees and power of attorney, communications, net capital computations and relatedrecords, 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 period: Five years: records of original

entry (journals), customer account records, financial records, communications, net capitalcomputations and related records, bills, written agreements, advertising, and powers of attorney; andThree 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 verycomplicated and burdensome due to Regulation S-P.

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Starting Point get emergency plan in place toenhance value of business at its sale

Acquisition planning

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Sample Checklists and Other Tools

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Anatomy of an RIA Acquisition

Documents

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