December 9, 2023

Registered investment advisors offer private equity investors a “perfect storm of market opportunity, fragmentation and revenue,” according to a new report.

investors often think 10th consecutive year of record sales M&A deals in wealth management still have access to $3.7 trillion in client assets managed by RIAs need a succession planA The road to greater growth Or way out of employee brokerage firms, research firm Cerulli Associates A study earlier this month showed.This conclusion overturns some predictions that mergers and acquisitions will Slowdown due to macroeconomic conditions.

Conventional wisdom says that investors such as private equity firms and other RIA acquirers “will get really nervous and shut the whole thing down,” but they’re instead focused on the “long game,” Brandon Kawal is principal at the firm. M&A Advisory Firm Advisor Growth Strategiessaid this week at a panel of dealmakers in New York.

“These are high-margin businesses. These are high-cash-flow, high-margin businesses. We hear it all the time, like, ‘Wow, these businesses are so profitable,'” Kaval said. “If you’re running a good business and you’re thinking about how you’re going to run your (profits and losses) and you’re managing your customers’ money, I think that’s very much at the core of what you do in these businesses, You can absorb some of the shock.”

What Drives Big Deals
Recently announced major deals show that private equity firms and RIAs with backers in the industry are capitalizing on this attraction.

In the first quarter, Focus Financial Partners reached a privatization agreement Under the leadership of Clayton, Dubilier and Rice Valuation over $7 billionwhile other RIA acquirers Mercer consultant and road stone It also secured new private equity investment.

This week, Geller & Company used a private equity-backed Dynasty Financial Partners RIA Platform,Open New Office in Jupiter, Florida Advisory business with $5 billion in client assets.and Carson Group — with Minority backing from Bain Capital — Acquired another RIA with $5 billion under management, the largest deal ever.

There are good reasons for private equity investors to continue investing in the pipeline.

According to Cerulli’s research, an average of 82% of RIAs’ revenue comes from recurring account fees, which are tied to the asset value of “sticky customer relationships.” In addition to this, they also enter RIAs from 6 new client accounts each year, adding an average of $6.8 million in assets.

In the past 10 years, the compound annual growth rate of assets managed by RIAs has exceeded 13%, reaching US$8.2 trillion, accounting for 27% of the total assets of the entire wealth management industry. According to Cerulli, in 2011 RIAs had only a 20 percent share.

“As the number of private equity firms participating in the RIA market continues to grow, Cerulli expects the aggregation model to continue to proliferate,” analysts Stephen Caruso, Donnie Ethier and David Fletcher said in the report. “At the same time, the increase in the number of investors will The increase in aspiring RIA acquirers is happening simultaneously, creating an inflection point where investment capital flows downmarket and smaller RIAs become buyers and, in some markets, they are seen as sellers.”

Dealmaking Skills
For financial advisors involved in RIA M&A discussions in this context, dealmakers say it is most important to have a clear understanding of the company’s goals in any transaction and the need to find a partner who aligns with the same goals.

Raj Bhattacharyya’s similar views in other areas such as “customer experience, growth strategy, level of trust in technology” and investment ideas are “good green flags”. CEO of San Francisco-based RIA Robertson Stephenssaid the panel.

“It’s really important for both parties to ask ‘Who is your ideal customer, and what is your ideal customer experience?’.” Saying that could be a red flag,” Bhattacharyya said. “Every buyer and every seller has a certain customer experience and what it means to be a customer of their company. This won’t change overnight. And, just because you bought someone, sold yourself to someone, merged with someone, and if the situation is not the same in the future, the customer is likely to leave, then, that should be a red flag. ”

The team led by Marc Cabezas, M&A Executive Director He said on the panel that he works at Chicago-based RIA acquirer Hightower and speaks to hundreds of consulting firms each year. RIAs that stand out are “very aware of where their business is in the business cycle and evolution,” he said.

“They have a solid understanding of where the business is going and where the company’s vision is for the future,” Cabezas said. Combined with this vision to help them accelerate their ability to achieve the future state faster, cheaper, and indeed in a more sustainable way than doing it alone.”