Real Deals: Achieving Purposeful Growth with Purposeful ... · Real Deals data and the trends they...

Real Deals: Achieving Purposeful Growth with Purposeful Transactions

Contents

Introduction 4

Purposeful Transactions Lead to Purposeful Growth 4

Report Objectives and Contents 4

Report Methodology 5

Transaction Trends Review: RIAs Lead Industry’s Third Wave of Deal Activity 5

Equity Transfer Is Increasingly Widespread 5

Real Deals and Why They Matter 6

Overall Pace of Real Deals Slows 6

RIA-RIA Transactions Represent Third Wave of M&A 8

Why RIA-RIA Deals Are Here to Stay 10

RIA-RIA Deal Trends 10

Strategy and M&A 13

Firms Increase Reliance on Transactions for Fueling Growth 13

Strategic Context Ensures Quality Growth 14

Recognizing and Evaluating Organic Growth Options 15

More Than One Way to Deal 17

Putting Forth a Purposeful Approach 20

Room for Improvement 20

Make the Most of Your Transaction Opportunity 21

Conclusion 24

Acknowledgements 24

Created in collaboration with:

Real Deals: Achieving Purposeful Growth with Purposeful Transactions 3

In Brief—What You Need to Know in 30 Seconds

Real Deals are no longer the domain of large institutions seeking to acquire only the biggest and most dominant RIAs. The bulk of Real Deals are now initiated by RIAs transacting with other RIAs across a variety of firm sizes and deal types.

One in four advisory firms was involved in some sort of transaction within the last five years. During this same time period, nearly one-half (48%) of all Real Deals involved RIAs transacting with each other. RIAs transacting with other RIAs now account for double the proportionate share of industry activity that was typical 5–10 years ago, when banks and other institutional buyers tended to dominate transactions.

For the 26% of firms that experienced a transaction, the vast majority made an acquisition—60% acquired a solo advisor with an existing practice and another 15% acquired a multi-professional advisory firm.

Nearly one in five firms credited a merger or acquisition as one of their top three drivers of recent growth. 28% of firms expect M&A to be a top driver for future growth, and 42% of firms expressed a preference for increasing their reliance on a merger or acquisition in order to generate client growth.

While many transactions can conceivably foster growth, those deals that most align with what a firm hopes to achieve strategically have the greatest chance of producing meaningful shareholder value. An ideal transaction, in addition to having strategic alignment with the firm’s growth goals, will also represent the most effective means for gaining a desired strategic advantage.

A transaction can realize a host of strategic advantages, all of which are capable of generating high-quality growth. Four particular advantages dominate: realizing benefits of scale, gaining access to a new market, acquiring new skills or capabilities, and effecting a succession of ownership.

A firm must determine whether a deal is even appropriate relative to other available tactics at its disposal. Assuming that a transaction is the right tactical option, a firm must carefully identify the optimal deal to pursue in terms of deal type and partner profile. With this accomplished, the firm has a foundation in place for a purposeful transaction.

The most successful transactions will require thoughtful due diligence, vetting and planning. A purposeful transaction that most appropriately aligns with a firm’s strategic objectives has the greatest chance of achieving high-quality growth that is sustainable and builds value.

3

3

3

3

3

3

3

3

4

IntroductionPurposeful Transactions Lead to Purposeful GrowthRIA-related mergers and acquisitions (M&A) activity is heating up again. In a turnabout from years past, RIA owners are spearheading the resurgence. One in four advisory firms was involved in some sort of transaction within the last five years. During this same time period, nearly one-half (48%) of all “Real Deals” involved RIAs transacting with each other. RIAs transacting with other RIAs now account for double the proportionate share of industry activity that was typical 5–10 years ago, when banks and other institutional buyers tended to dominate transactions.

While many firms are keenly interested in the potential of a transaction with another RIA, often their motivations for pursuing a deal lack clear definition. In contrast, the most successful deals are carried out with a sense of purpose and designed to further the strategic objectives of firm shareholders in the most effective manner possible. Thoughtful firms recognize that a transaction is often just one of several means for achieving these objectives.

Ideally, transactions are considered in context with the strategic objectives of the firm, including how the transaction aligns with firm strategy and why the transaction represents the best means for furthering firm objectives. While a merger, sale or acquisition can be a powerful force of positive change, deals are only a distraction if the firm pursues them without a clear sense of purpose.

Report Objectives and ContentsThe guidance presented offers more specific rules for determining if or when a transaction is the optimal course of action for an RIA. Our report provides firms with a broader perspective for what can or cannot be achieved when merging with a firm or buying or selling one.

Nearly a decade ago, Pershing was among the first of industry service providers to recognize the powerful potential of a merger or transaction. A lack of appropriate advice for best taking advantage of M&A-related opportunities, however, limited the number of firms able to realize this potential. In response, Pershing launched its first Real Deals report in 2006.

Our current Real Deals edition is the sixth comprehensive report in the series. Like past reports, its intention is to provide advisory firm owners with actionable M&A intelligence. The information provided aims to support firms in improving their decision making regarding whether to deal, who to deal with and how to best consummate a deal.

Similar to previous reports, we begin with a review of recent mergers and acquisitions trends, the most notable of which is the increasing prominence of the RIA-RIA deal. Given the growing role that RIAs play in initiating their own transactions, the overarching aim for this Real Deals report is to encourage firm owners to take a more purposeful approach toward transactions.

To assist with this, Real Deals: Achieving Purposeful Growth with Purposeful Transactions shares a broad perspective for what to expect when RIAs transact with other RIAs and offers specific rules for determining if or when a transaction is the optimal course of action. In addition to the trends review, our report coverage compares organic versus inorganic growth strategies, reviews the key objectives that can be achieved through a transaction and provides guidance for determining the appropriateness of a transaction opportunity.


Report MethodologyIndustry data and executive interviews, combined with a decade worth of knowledge accumulated by FA Insight through direct consultation with many advisory firms, formed the basis for the findings and recommendations set forth in this report.

To update its database for tracking M&A activity, FA Insight mined a range of data sources. These included MergerStat, trade publications and investment banking websites, as well as FA Insight’s proprietary survey data detailing the operating characteristics and recent transaction activity of nearly 350 advisory firms.

To produce case studies and to yield other direct advisory firm examples and references, FA Insight conducted a series of 45-minute interviews with executives from a cross-section of leading advisory firms, who generously discussed their experiences and opinions with regard to carrying out a transaction.

Transaction Trends Review: RIAs Lead Industry’s Third Wave of Deal ActivityEquity Transfer Is Increasingly WidespreadAs the independent advice industry matures, transactions involving every type of equity exchange are increasingly commonplace. These exchanges of shares occur for a variety of reasons. Aging owners seek to cash out on their original shares. Transferring ownership incents a new generation of firm leaders and ensures the legacy of the firm. Mergers and acquisitions reinvigorate transacting firms by stimulating another round of growth.

Transfers of ownership can occur internally among individuals within a firm, or between a firm and another firm or external individual. Both types of transfers are widely prevalent. Figure 1 illustrates the typical rate of owner turnover in recent years based on new partners introduced into a firm. In 2013, about 16% of firms welcomed a new owner within the last two years, up from approximately 14% in 2011.

Figure 1: NEW ADVISORY FIRM OWNERS ARE ON THE INCREASE

2011 2013

3.8% 5.8%

9.7% 9.7%

Internal Promotion New External Owner

Share of Firms Admitting New Owner Within Last Two Years

Source: FA Insight proprietary data.

6

As shown, the tendency is to internally promote an owner, though firms are increasingly taking on owners from outside sources via transactions with external parties. Still, in 2013 firms were nearly twice as likely to internally promote an employee to owner status as opposed to bringing in an outsider.

Changing ownership as a result of a merger or acquisition appears to occur at about the same frequency that firms consider new individual owners. One in four advisory firms was involved in a merger or acquisition between 2009 and 2014. In 2014, 6% of the average net new growth in firm clients resulted from a merger or acquisition, according to FA Insight survey data.

Real Deals and Why They MatterA simple extrapolation of these survey results suggests that literally 1,000 or more RIA firms could be involved in some form of ownership transfer during the course of a given year. While it is not practically possible to routinely quantify and detail all of these transactions, Pershing and FA Insight have tracked an important subset of these deals for many years.

About 10 years ago, Pershing introduced the industry’s first data series tracking mergers and acquisition activity among RIAs. The database supporting this series, maintained in partnership with FA Insight, extends back to the early 2000s. Coverage targets “Real Deals,” defined as mergers involving an RIA or acquisition of an RIA that is retail-focused, as well as managing $50 million or more in assets or earning $500,000 or more in annual revenues.

The number of Real Deals, typically in the range of 35–50 in recent years, may appear to be only the tip of the iceberg, but these deals are indicative of overall transaction activity. These deals have a significance that is many times greater than the percentage of total overall transactions they represent, however. This is true both in terms of their proportionately greater share of firm revenue and AUM that Real Deals represent as well their influence in dictating the timing and terms of all other transactions.

Real Deals data and the trends they reveal serve all firms in a variety of ways:

› Real Deals lend perspective for owners in evaluating the most appropriate solution for liquidating equity

› Real Deals activity, by reflecting general investor confidence in the industry, provides owners a barometer to gauge the extent to which new investment may be warranted in their firms

› Real Deals contribute to a better understanding of how an owner can better drive value in a firm

Regardless of the transaction type, Real Deals trends data can provide useful guideposts for determining the nature, timing and valuations for these transactions.

Overall Pace of Real Deals SlowsThe total of 42 Real Deals tracked in 2014 represent a typical level of industry activity for recent years (Figure 2). While off from the pace of 48 deals tallied in 2013 and significantly lower than the pre-recession 2007 peak, the 2014 total was slightly above to the five-year 41.4 average during the 2010–2014 period.


Figure 2: TOTAL 2014 REAL DEALS TYPICAL OF RECENT YEARSNumber of Transactions

3036

50

3040

463836

51 48

29

69

3348

42

2000 20082004 20122002 20102006 20142001 20092005 20132003 20112007


A roughly similar cyclical trend emerges with regard to the total assets under management controlled by the target firms of these deals (Figure 3). Relative to the peak in transactions activity just prior to the recession, however, the falloff in recent activity is more notable in terms of assets due to a trend toward smaller target firms. Assets managed by the typical target firm in 2014 at $340 million, were just one-third of the median for target firms at the start of the Real Deals series in 2000.

Figure 3: TYPICAL AUM PER REAL DEAL TARGET SHOWS CONSISTENT DECLINE

1,000

650

434

690

600 600

868

500470

400

500

603

428

340

520

133.447.9 45.634.8 43.136.2 61.442.3 71.8 32.6 70.3 45.4113.0 62.2 65.8

2000 20082004 20122002 20102006 20142001 20092005 20132003 20112007

Median Deal AUM in $Millions Total AUM in $Billions


8

RIA-RIA Transactions Represent Third Wave of M&AWhile the decline in assets associated with target firms could reflect less M&A activity within the industry, a more telling interpretation is that transactions are simply becoming more widespread among RIAs. Real Deals are no longer the domain of large institutions seeking to acquire only the biggest and most dominant RIAs. The bulk of Real Deals are now initiated by RIAs transacting with other RIAs across a variety of firm sizes and deal types.

Transaction trends have changed markedly over the course of our 15-year Real Deals data series. These years readily group into three five-year periods according to dominant buyer types, summarized below.

› 2000–2004: One-off Institutional Buyers—Institutional buyers, typically consisting of banks and, to a lesser extent, accounting firms were among the first to recognize the growing success of the independent financial advisor business. They sought acquisitions of the most successful firms in order to diversify revenue streams and achieve greater wallet share of their existing client bases. This period produced few success stories, however, as buyers often underestimated the challenges of integrating different business models and cultures.

› 2005–2009: Aggregators—Private equity-backed “investor” buyers, typically referred to as aggregators or consolidators, gained prominence during this period. While each of the many aggregators active during this time had distinct characteristics, most all in some way aimed to gain synergies and increase value through consolidation. Like the one-off institutional buyers before them, many aggregators found the model difficult to successfully implement. Only a few firms from this period remain viable today (most notably Focus Financial and United Capital). Many of the aggregators that do remain from this time shifted their focus away from outright acquisitions of firms and toward assisting existing acquisitions grow organically or inorganically through “sub-acquisitions.”

› 2010–Present: RIAs—In recent years RIAs transacting with other RIAs have emerged to become the most prevalent type of deal pairing, accounting for nearly half (48%) of all Real Deals during the past five years. With M&A no longer touching only an elite subset of firms, RIA-RIA activity is twice the proportion of industry transactions compared with 10 years ago. Large RIAs, previously viewed as prime acquisition targets, are now prime acquirers. Mergers of equals and a variety of other deal types have grown in popularity as well.


Figure 4: RIA-RIA DEALS GROW IN PROMINENCEPercent of Acquisitions

Traditional Aggregator Other

2000

2008

2004

2012

2002

2010

2006

2014

2001

2009

2005

2013

2003

2011

2007

7.7% 15.4%

11.1% 19.4%

21.7% 19.6%

3.4% 6.9%

22.0% 12.0%

35.9% 10.3%

15.8% 26.3%

25.7% 8.6%

24.0% 10.0%

18.2% 15.2%

10.3% 0.0%

22.9% 10.4%

26.5% 11.8%

17.0% 6.4%

Bank/Trust

53.8%

50.0%

8.7%

72.4%

26.0%

25.6%

18.4%

42.9%

40.0%

24.2%

51.7%

25.0%

33.8%

14.9%

14.3%

1 RIA One-Off

19.2%

19.4%

41.3%

17.2%

26.0%

28.2%

21.1%

20.0%

22.0%

27.3%

34.5%

33.3%

23.5%

44.7%

31.0%

+RIA Serial Buyer

3.8%

0.0%

8.7%

0.0%

14.0%

0.0%

18.4%

2.9%

4.0%

15.2%

3.4%

8.3%

4.4%

17.0%

11.9% 21.4% 21.4%

Note: “RIA One-Off” denotes independent RIA firms involved in one-time or infrequent deals. “RIA Serial Buyer” includes firms that originate as RIAs and have made three or more transactions within the previous four-year period. “Traditional Aggregator” includes investor-backed firms formed with the express purpose of making multiple acquisitions. “Other” denotes any other buyer type including broker-dealers and accounting firms.


10

Why RIA-RIA Deals Are Here to StayWhether the transaction involves a Real Deal, “tucking-in” a new advisor, or promoting an employee to become partner, transitions of equity are becoming increasingly common as well as vital to the success and sustainability of the RIA firm. RIA deal-making will invariably continue and grow in frequency. Firm owners are increasingly aware of the potential benefits of a transaction and increasingly confident in initiating one.

No trend is a stronger stimulus for a transaction than aging firm founders with an increasing desire to facilitate an ownership or management succession. The independent advice industry was pioneered in the 1980s and early 1990s by individuals as an alternative to the commission-centric brokerage model that dominated during this period. As these firm founders near retirement, the entire industry is in a transition stage. Contrary to years past, acquiring equity of an existing firm is becoming nearly as commonplace as building equity from the ground up by founding a startup.

As the industry matures, competitive factors are also spurring new demand for RIAs to pursue transactions. These include a growing desire to achieve scale, which in turn is enabling firms to reduce costs or become more competitive within a market. As Bill Hart with Retirement Strategies Inc. put it, “If you don’t get to a certain size it’s going to be very difficult for the firm owner to recognize any real value out of what they have created.”

Deals are also gaining recognition as an effective way to broaden expertise in light of an increasingly competitive labor market. Several of the executives interviewed for this study cited the need for talent as a prime component of their acquisition strategies. Michael Nathanson of The Colony Group was typical when describing his firm’s motivations: “Hiring people on an ad hoc basis is not easy. The process of bringing people in one at a time, all these people doing interviews, and looking at a hundred resumes for every one interview—it’s a tedious process. Merging in a firm, you’re essentially buying a team, and not just an individual person.”

RIA-RIA Deal TrendsDuring 2014, the bulk of RIA-RIA transactions tended to be in the form of one-off deals, either mergers of equals or small firm acquisitions initiated by larger firms. The deal between Evensky & Katz and Foldes Financial Management was among the year’s most noteworthy merger of equals. In addition to strengthening succession plans for firm founders, the deal formed one of the largest independent advisory firms in South Florida.

In the first of our five profiles featured in this report, the Retirement Strategies acquisition of Collins Capital Management offers a good example of an increasingly typical RIA-initiated acquisition. The deal involved two mid-sized firms combining in order to create a more lasting and competitive firm.


Retirement Strategies, Inc. and Collins Capital Management—Enhancing Competitiveness and Sustainability

In November 2013, Collins Capital Management, Inc. (CCMI) merged into Retirement Strategies, Inc. (RSI). In many ways, the transaction between the two Jacksonville, Florida-based firms is exemplary. It is a type of deal that will become increasingly commonplace as firm owners strive to maintain competitiveness and build shareholder value.

RSI, the larger firm with about $180 million in AUM prior to the acquisition, was looking to grow more quickly than it could organically. According to RSI partner Bill Hart, achieving greater scale was especially important to the firm in terms of bolstering its reputation within the community, creating a more desirable firm for clients to work with and a more desirable firm for employees to work for. Additionally, RSI, a more planning-oriented firm, sought to broaden its investments expertise.

CCMI, with nearly $70 million in AUM, was mostly an investment management firm but served a client base similar to RSI—working affluent who built their wealth through disciplined savings practices. The firm’s founder and sole shareholder, Sheila Collins, faced a juncture: She was approaching retirement age and needed to commit to another 5-7 years to build an internal transition team or find an existing firm that would fit well with her clients. With an office lease coming up for renewal, and reluctant to commit the additional years needed for an internal succession, the time was right for her to make a move.

While shareholders of the two firms had known each other casually for several years, serious discussions about a merger did not take place until early 2013. Conversations focused on getting to know each other personally, philosophically and culturally. Over the course of a few months, the two firms eventually felt confident the match would be a good fit and agreed to move forward with a deal.

As of November 2014, the firm managed $275 million in assets for about 300 clients. Combining the strengths of RSI’s planning methods with CCMI’s proficiency in portfolio management, the firm is now among the top five independent advisory firms in the Jacksonville area. Most importantly, the firm has embarked on a new growth trajectory based on more than just attracting new client relationships. As RSI’s Hart described, in creating a bigger firm, they have opened up opportunities for a new generation of owners in terms of better career paths and the chance to buy into a firm with real value.

Among the most important developments fueling the increase in RIA-RIA transactions is the RIA “serial buyer.” Taking a cue from traditional aggregators, these RIAs are initiating multiple acquisitions as a cornerstone of their growth strategies. As shown in Figure 4, the RIA serial buyers have accounted for about one-third of all RIA-RIA Real Deals transactions during the last five years. Mariner Wealth Advisors, Atlanta Capital Group, and Colony Group (see the following profile) are among the most recently active of these emerging buyers.

To a lesser extent, employee buybacks of a parent-owned RIA are also increasing in frequency. The trend is indicative of earlier institutional acquisitions that failed to live up to expectations for both the buyer and seller.

12

The Colony Group—Merging to Get Better, Not Bigger

The Colony Group is part of a new breed of leading RIAs that regularly initiate transactions with other RIAs. Founded in 1986, the Boston-based firm did not consummate its first deal until July 2012, merging in Mintz Levin Financial Advisors LLC, also of Boston. Two more deals followed on a roughly annual cycle. In October 2013, the firm merged in Prosper Advisors of New York, followed by a merger with Boston-based Long Wharf Investors in July 2014.

Fueled largely in part by these mergers, the fee-only wealth management firm tripled in size during the past three years, with $3.75 billion in AUM as of November 2014. But for Michael Nathanson, Colony’s chairman, CEO and president, the objective is not to just get bigger—what matters most to the firm is to get better. In Nathanson’s words, “I’ve long believed that through mergers we would be able to do greater things and be greater for our clients.” In particular, the firm looks to mergers in order to bring in new people who can offer new ideas and best practices, plus have a willingness to collaborate in order to improve Colony’s ability to serve its clients.

Being planners by nature, the firm’s management strategically approaches transactions in much the same way they work their clients. They are deliberate and disciplined, evaluating potential partners according to strict criteria. As Nathanson explained, “We have walked away from many transactions where our discipline was threatened. And we will undoubtedly walk away from many more in the future.”

Colony’s evaluation criteria are summarized below by areas of focus and key requirements:

› Client service

- Fiduciary

- Wealth management-oriented

- Compatible investment philosophy

- High client retention rate

- Low client-to-advisor ratio

› Staff and ownership

- Highly qualified professionals with advanced degrees and certifications

- Tenured firm leaders

- High-integrity individuals who can embody the firm’s brand and expand upon it

› Geography

- East Coast preference

› Firm size and economic opportunity

- Above revenue minimum

- Above minimum earning before owner’s compensation

- Above minimum revenue per employee

- Above profitability minimum


Colony’s organized approach to transactions is serving it well with the firm realizing a range of important benefits from each deal. These include improved capabilities for open architecture investing, new planning techniques, greater expertise with regard to alternative investment vehicles, and improved marketing and business development tactics. Further, with 28 partners working at all different levels within the firm, The Colony Group is set for multiple generations of continuity.

Strategy and M&AFirms Increase Reliance on Transactions for Fueling GrowthMergers and acquisitions are clearly playing an expanded role in the growth and progression of RIA firms. As shown in Figure 5, a significant minority of firms relied on a transaction for fueling recent growth and more are expected to do so in the future.

Figure 5: ROLE OF M&A AS GROWTH DRIVER EXPANDSPercentage of Firms Responding

19% 28% 42%

M&A Top Driver of Recent Growth

M&A Expected Top Driver for Future Growth

Prefer More Future Client Growth Through M&A

0%

When asked to cite their top three drivers of recent growth, nearly one in five firms credited a merger or acquisition. The role of transactions is anticipated to increase substantially, with 28% of firms expecting M&A to be a top driver for future growth. Additionally, 42% of firms expressed a preference for increasing their reliance on a merger or acquisition in order to generate client growth.

14

Strategic Context Ensures Quality GrowthFor a transaction to be truly effective in propelling growth, however, the deal must be done in accordance with the firm’s overall growth strategy. While many transactions can conceivably foster growth, those deals that most align with what a firm hopes to achieve strategically have the greatest chance of producing meaningful shareholder value. As Jeff Fuhrman with LLBH Private Wealth Management explains, “Just because you’re not paying a lot or you know your risk is limited doesn’t mean you are getting a good deal.”

A transaction can realize a host of strategic advantages, all of which are capable of generating high-quality growth. Four particular advantages dominate. As covered in previous Real Deals reports, they include greater economies of scale, accessing new markets, accessing new expertise and facilitating a succession solution. We summarize each of them again here:

› Realizing benefits of scale: Scale is often the chief reason firms transact with one another. Combining firms simply to reach a larger size will not necessarily create economies of scale, however, unless owners actively work to identify advantages that can be achieved across business capabilities. Centralizing functions or creating deeper dedicated management capabilities are just two examples of how scale economies can be achieved when firms combine.

› Gaining access to a new market: A merger or acquisition can be an effective way to tap into a new market, particularly when speed to market is of the essence for capturing the opportunity. The new market could be in the form of expansion into a new or existing geographic region or building a presence within a niche market of target clients. Ideally it will complement the acquiring or merging firm’s existing service offer.

› Acquiring new skills or capabilities: As the advisory firm labor market tightens, joining with another RIA is an increasingly popular way to plug gaps in expertise at an accelerated rate. This may include, for example, acquiring enhanced technical advice or investment capabilities, technology capabilities or management capabilities—each of which would require greater lead time to develop internally.

› Effecting a succession of ownership: A succession-focused transaction with another RIA can be solely focused on creating an exit strategy for an owner. A succession-focused transaction may also be pursued with sustainable growth in mind. Such transactions can distribute ownership over a larger number of shareholders, potentially increase the pool of future internal successors, ensure new capabilities to sustain the firm’s growth and provide a long-term continuity plan for clients and staff.

As founders age and the labor market for experienced advisors tightens, acquiring new expertise and effecting a succession of ownership are increasingly sought after objectives. Our profile of Pathstone Family Office, LLC highlights a firm that is utilizing a thoughtful acquisition strategy to successfully address both issues.


Pathstone Family Office, LLC—Upholding Their Promise to Clients Through Acquisition

Pathstone Family Office (Pathstone) was founded in 2010 by Steve Braverman, former President of Harris myCFO Investment Advisory Services. Following a “lift out” from Harris myCFO, Pathstone served 44 families and had approximately $3 billion in assets under management, with 35 staff members and 8 owners as of October 2014. Described by Braverman as an “accounting firm stapled to an RIA,” the comprehensive family office “won’t walk your dog, but will background check the dog walker, make sure they’re on payroll and offer them a 401(k).”

According to firm founders, the Pathstone merger and acquisition strategy is central to their ability to win new business and serve clients effectively. Client relationships span generations and, as such, the firm must demonstrate an ability to serve future generations. As Braverman explained, “We make a 100-year promise to serve our clients’ families, so we need to ensure we build an organization that perpetuates itself.”

Creating a deep bench to support growth is the driver to do so. The firm views acquisitions as the most efficient means to access passionate individuals with deep technical skills and an understanding of high-net-worth, multi-generational families. Braverman refers to the strategy as “acqui-hiring,” where single or multi-family offices are acquired and aligned to the Pathstone business model to efficiently grow the firm’s base of talent as well as drive economies of scale.

Braverman said, “Hiring one person at a time…is something that we will always do. The ability to bring in three, four, or 12 passionate individuals at once who understand how to care for ultra-high-net-worth, multi-generation families is a jackpot for us.”

Pathstone has also been on the other side of a deal as well, which sets the firm up nicely for making future acquisitions of its own. In August of 2014, Pathstone sold a minority stake to Fiduciary Network, LLC. In addition to enabling Pathstone to establish an employee ownership program for solidifying future firm leadership, the partnership with Fiduciary Network provides Pathstone with further expertise and capital for future growth through acquisitions.

Recognizing and Evaluating Organic Growth OptionsGaining any one of these advantages could be game changing for a firm’s growth prospects. Despite this growth potential, it is important to recognize that a transaction is not necessarily the only way to achieve these outcomes. An ideal transaction, in addition to having strategic alignment with the firm’s growth goals, will also represent the most effective means for gaining a desired strategic advantage.

Organic options can often be pursued to accomplish the same objectives. For example, rather than acquire a firm in order to extend investment management capabilities, a firm could always develop and train an individual from within or look outside to make a strategic hire.

Figure 6 provides guidance and considerations for firm owners in evaluating whether an organic or inorganic approach is most appropriate. The answer as to which approach is best ultimately depends upon the strategic intent of the firm, that ideally will be a product of its unique operating characteristics, existing opportunities and shareholder aspirations.

16

Figure 6: Evaluating Organic vs. Inorganic Growth Approaches

Organic Growth Inorganic Growth

› Growth achieved “from within,” maximizing existing business capabilities. Examples include growing the firm’s existing client base, improving efficiency in order to increase profitability and reinvesting profits to increase service capacity

› Growth achieved as a result of a merger with, or acquisition of, another firm

› Less expensive relative to an acquisition

› Less risky with fewer variables to control relative to inorganic growth

› Easier to maintain the existing brand, identity, culture and management style of the firm

› Can immediately expand assets, revenues and market presence

› Greater potential for achieving economies of scale

› Potential to reduce direct competition when acquiring or merging with a competing firm

› Access to new markets that might not otherwise be available

› Opportunity to benefit from a more diverse pool of skills and experiences

› Increased options for succession of ownership and management

› Growth is likely slower relative to inorganic growth

› Growth opportunities are largely a function of the firm’s existing capabilities, and competition and may be limited relative to an inorganic approach

› Acquisitions can be expensive relative to organic growth

› Greater risk given more variables that are difficult to control relative to organic growth

› Sudden increase in size and complexity of the firm may test management capability

› Potential challenges in combining brands, culture and management styles of transacting firms.

› Potential challenges in integrating and standardizing an organizational structure and compensation philosophy and plan

› Systems and support capabilities must combine and scale to meet the demands of a larger entity

› Possibility of diseconomies of scale without a smooth integration of transacting firms

› Where shareholders identify existing capabilities or a market opportunity that can be exploited to drive accelerated growth. For example, the expansion of an existing business development program that has begun to show results but is yet to be fully implemented across the firm

› When the desired rate of growth cannot be achieved through the implementation of organic strategies

› Where the achievement of strategic objectives requires the implementation of major change. For example, securing a succession solution in order to facilitate the immediate exit of a majority shareholder where no internal succession is possible

Des

crip

tion

of

App

roac

hK

ey A

dvan

tage

sK

ey D

isad

vant

ages

Whe

n B

est

to A

pply


More Than One Way to DealIf shareholders agree that an inorganic approach to growth is appropriate for furthering the firm’s growth goals, the final layer of decision-making relates to the type of deal to pursue. Deals can come in many forms, each with its own set of advantages and disadvantages. Figure 7 shows the distribution of deal types that advisory firms engaged in during the 2009–2014 period, according to FA Insight survey data.

Figure 7: ACQUIRING SOLO PRACTICE IS MOST COMMON DEAL TYPEDistribution of Deals by Type, 2009–2014

16% Other deal type

60% Acquired solo practice

15% Acquired multi-professional firm

7% Merged with another advisory firm

2% Acquired by entity other than another advisory firm

Source: FA Insight proprietary survey data.

For the 26% of firms that experienced a transaction, the vast majority made an acquisition—60% acquired a solo advisor with an existing practice and another 15% acquired a multi-professional advisory firm. Least typical was for the firm to be acquired by some entity other than a financial advisory firm. Despite this low share, one in 10 firms overall indicated some form of parent ownership in 2014.

Like the comparison of organic and inorganic growth approaches, the type of deal that is best for a particular firm to pursue depends upon the growth objectives and personal preferences of shareholders. A firm can choose to merge with another firm of equivalent stature or alternatively make an acquisition. Acquisitions will most typically come in the form of acquiring a firm outright, acquiring a solo advisor, or simply purchasing an advisor’s book of business. The virtues of all of these deal types are summarized in Figure 8.

18

Figure 8: Deal Type Primer

Merger

Description: A merger most often involves firms of similar size coming together as one. Management of the newly formed firm usually has equal representation from the management teams of the merging firms. Typically no payments are exchanged; shareholders of the merging firms will simply exchange shares in their original firms for shares in the new firm.

Applicability: No deal type may have the potential to achieve as many growth objectives as a merger. Merging with a similarly-sized firm can be one of the fastest ways for a firm to achieve greater scale. A merger can also allow transacting parties to better dominate a market or enhance client service through a broader skill set. A merger can be effective in enhancing succession options for shareholders by extending the pool of potential successors as well as improving the firm’s access to succession financing.

Special Considerations: While mergers can be the most rewarding of transactions, they can also be challenging to successfully implement. Thorough due diligence and transition planning is critical in order to ensure that the brand and culture of the merged firms remains cohesive and strong, and that respective organizational structures, compensation plans and technology systems are successfully integrated.

Firm Acquisition

Description: An acquisition most often involves a larger firm acquiring a smaller one, where the onus is typically on the acquired firm to adapt to the ways of the acquiring firm. Shareholders of the acquired firm may be bought out entirely or shares of their old firm would simply be exchanged for shares in the acquiring firm. Shareholders of the acquired firm may remain with the new firm as either shareholders or employees, or have a plan for exiting once the deal is completed.

Applicability: Acquiring a smaller firm is particularly effective for gaining access to new skills or markets where the acquiring firm may be challenged to gain access on its own. This deal type could also introduce new successors to the firm or, conversely, allow the shareholders of the acquired firm a potential succession and exit plan. Growth opportunities could further arise as team members from the acquired firm have more freedom to specialize and focus where they can make the greatest contribution to their new firm.

Special Considerations: The deal type is expensive if shareholders of the acquired firm seek immediate compensation beyond an exchange of shares in their new firm. To a lesser extent relative to a merger of equals, challenges may arise in terms of forming a common brand and culture. The successful integration of organizational structures, technology systems and compensation plans must be addressed as well.


Tuck-In

Description: The tuck-in acquisition refers to an individual advisor or small team of advisors with a book of business. While often the targeted tuck-in is an advisor transitioning out of a wirehouse brokerage model, tuck-ins may involve other advisor types. Tuck-in advisors may be brought on as new shareholders or employees. The joining advisor may be compensated for new clients brought to the firm with equity, or alternatively a cash agreement may be worked out.

Applicability: Firms can carry out a series of tuck-in acquisitions as a means to build scale while avoiding the complexity of overseeing a firm merger or acquisition. While more deals may be required to do so, candidates are far more plentiful relative to prospecting for a suitable firm for a transaction. This is especially true if the firm is targeting breakaway brokers. Tuck-ins may also be appropriate for plugging a particular gap in skill or expertise.

Special Considerations: Tuck-ins, similar to an “arranged marriage,” require a personal and cultural fit between the transacting parties in order to succeed. Appropriateness of fit will be particularly challenging for an RIA targeting breakaway brokers, who often come from a very different culture and operating environment. Additionally, the risk of clients failing to transition to the new firm is high in situations where the acquired advisor’s clients hold strong allegiances to the advisor’s previous firm.

Acquisition of a Book of Business

Description: Perhaps the simplest of transactions is the purchase of an advisor’s book of business. These acquisitions could result from a solo advisor looking to retire or a buy/sell agreement triggered by the incapacitation of an advisor.

Applicability: Acquiring a book of business is particularly suitable for firms looking to fill excess servicing capacity or for firms that are weak or lack capacity for marketing and business development.

Special Considerations: Compared with other types of deals, the risk that clients will not transition to the new firm is highest. Without the servicing advisor to accompany the purchased “book,” the acquiring firm will need to perform especially careful due diligence to ensure the acquired clients are a good fit for the firm.

20

Putting Forth a Purposeful ApproachRoom for ImprovementRegardless of the type of deal, initiating a merger or acquisition can be a time-consuming and complex undertaking for an advisory firm. It is a multi-faceted process requiring careful management in order to successfully further the growth objectives of the firm.

Steve Braverman of Pathstone Family Office provides personal testament to this: “What we have learned is that anything worth doing is worth taking your time with. We’ve really had to prepare ourselves for the appropriate investment in time, effort and focus as we step into these opportunities.”

This process begins with confirming the appropriate deal to pursue and culminates in assimilating the merged or acquired business into the new firm. While the process requires a significant investment in time and effort, as illustrated in our profile of Edge Capital Partners, it will pay multiple dividends for patient executives.

Edge Capital Partners—Sharpening Deal Criteria with Patient Perseverance

Founded in 2006 and headquartered in Atlanta, Edge Capital Partners, LLC (Edge) grew organically to $2.5 billion in assets under management since its inception. The multi-location firm also maintains team members in Charlotte, Dallas, Houston, Lexington and Tampa. Its service positioning is that of chief investment officer, delivering unique investment solutions for clients. The firm’s typical relationship size is $10–20 million in AUM, with some clients with more than $100 million in assets.

Over the years the firm’s partners kept a watchful eye on opportunities to create scale, which included maintaining a list of prospective deal partners. By exploring a number of deal opportunities that did not eventuate, firm partners were able to continually sharpen their criteria for future deals. As Harry Jones, a managing partner with firm, explained, “We had been down this road before and had deep conversations that did not pan out, but it was an important learning experience.”

For the partners at Edge, any deal “must begin with a level of comfort in knowing the group and the individuals involved,” according to Jones. Firm culture is a primary consideration. The investment philosophy, client focus, pricing model and services offered by the selling firm were also important contributing factors in determining a good fit.

In the fall of 2014, Edge was ready to make its first acquisition, joining forces with the Atlanta-based RIA Glenmore Advisors. The deal created greater scale for Edge in its local market by adding approximately 25 clients. Beyond scale, the deal created new opportunities for operational improvements. Reporting capabilities of the newly acquired firm could be leveraged. Deeper investment capabilities were also anticipated. For example, Glenmore’s successful three-year track record with a liquid alternative strategy was attractive to the acquiring firm.

Perhaps most importantly, the deal positions the firm well for continuity and the succession of founding partners. “We have paid close attention to making sure we have leaders at the firm who are at various stages in their careers,” said Jones. By bringing in a new partner, in his forties and with a wealth of experience, the addition contributes to the sustainability of the Edge business model. Jones further emphasized that this is also beneficial from a client coverage standpoint, where different generations of leadership can readily sync up with its multi-generational client base.


For firms that have had experience with a transaction, deals are largely delivering on expectations, but there is room for improvement. Figure 9 compares the benefits firms expected to experience as a result of a transaction versus what they actually experienced.

Figure 9: EXPECTATIONS OFTEN FALL SHORT OF REALITYPercentage of Firms Responding

Expected Benefit Actual Benefit

Source: FA Insight proprietary survey data.

Increase revenue growth

Increase asset growth

Increase client growth

Realize economies of scale

Expand into a new market

Facilitate succession solution

73%66%

59%54%

44%41%

33%35%

23%20%

20%16%

Among the leading expected benefits, firms most often cited increasing revenue growth. While nearly three-quarters of firms (73%) anticipated increased revenue growth, just two-thirds saw this as an actual benefit. Deals also fell slightly short of expectations in terms of other anticipated growth benefits (asset and client growth), anticipated ability to expand into a new market and anticipated succession solutions. In contrast, a smaller share of firms expected to realize economies of scale from a deal (33%) than those firms that actually realized economies as a result of transaction (35%).

Make the Most of Your Transaction OpportunityHow does a firm ensure that a deal will meet expectations and most effectively further the firm’s growth strategy? The answer comes in two parts. First, a firm must determine whether a deal is even appropriate relative to other available tactics at its disposal. Second, assuming that a transaction is the right tactical option, a firm must carefully identify the optimal deal to pursue in terms of deal type and partner profile. With this accomplished, the firm has a foundation in place for a purposeful transaction.

To confirm whether an RIA-RIA transaction is worth pursuit, Figure 10 lists four key steps for consideration. While these steps may seem obvious to many firm executives, they are listed here as reminders of critical issues that are often overlooked when a transaction opportunity arises.

22

Figure 10: Take Time to Plan

Four Key Steps for Avoiding Buyer’s Remorse

Define objectives: It is a cliché worth repeating—if you don’t know where you are going, any road will take you there. Clearly defined objectives, including the personal objectives of shareholders as well as the strategic objectives of the firm, serve as valuable guideposts. Without them it is impossible to adequately determine whether a transaction is in the best interests of the firm and its shareholders.

Identify the problem: Firms are often tempted to react to a deal opportunity as it presents itself. A purposeful transaction results from a specific need to address an issue to overcome as identified in the firm’s strategic plan.

List all options: As another old saying goes, “there is more than one way to skin a cat.” While a transaction may take the firm in the direction it wants to go, another initiative might do the same but more effectively. Identify all practical options, inorganic as well as organic, for achieving necessary firm objectives.

Analyze and discuss: Conduct a thorough analysis of each option to determine which initiative will be most effective for driving the firm’s growth strategy. Review and evaluate the best options for achieving the firm’s objectives from the perspectives of cost, risk, timing, business continuity and associated distractions.

If an inorganic solution is determined to be the optimal course of action, further deliberation will be required to determine the appropriate transaction type based on the guidelines previously presented. A final set of considerations, and another critical planning component for a purposeful transaction, is to confirm the qualities of the most appropriate transaction partner. Similar to having a job description in place before making a new hire, a detailed profile of the optimal target will help to keep the firm on track as it identifies and vets potential deal partners.

Profiling is an area The Colony Group understands well. Michael Nathanson describes the firm’s approach as follows: “We have a written profile that details what we’re looking for in an organization. It’s agreed upon with our leadership team and built into our strategic plan. It really all comes down to, do we make the target better and do they make us better?” Such a profile will describe the desired business and operating characteristics, firm culture, strategic goals, shareholder personalities and other preferred attributes of the prospective deal partner.

Alignment of strategy and a solid personality fit across all the shareholders involved in the transaction is especially important, but is sometimes overlooked. In particular, both parties will want to confirm a potential fit in terms of the following:

› An aligned sense of purpose regarding key objectives for the transaction

› Agreement regarding the vision for the combined firm post transaction

› Compatible personal chemistry

› Willingness to compromise


While each firm will have its own unique take on what is most important for the success of a deal, no firm can afford to compromise with regard to their distinct principle requirements—it is much easier to walk away from a potential deal than it is to unwind a deal gone bad.

As Steve Braverman of Pathstone Family Office sums up, “You must recognize that most negotiations don’t end up in a deal, because the right deals are hard to do. A great price for a bad team is not a good deal.”

In our final profile, LLBH Private Wealth Management offers a good example of another patient firm willing to take its time in order to ensure a transaction that will be optimal for the firm’s needs.

LLBH Private Wealth Management—Methodically Seeking the Right Opportunity

Four partners, formerly with a major wirehouse, established LLBH Private Wealth Management in October 2008 with the support of Focus Financial. The partners left their previous employer with $450 million in assets under management. The firm, focusing on providing a full suite of wealth management services to the $10–100 million high-net-worth market, grew to managing more than $1 billion by late 2014.

LLBH has completed just one small transaction in its brief history, but firm partners and their COO are quietly gearing up for more impactful deals in the immediate future. In 2012 the firm merged in a Greenwich, Connecticut-based advisor who joined the LLBH office in Westport. The merger brought an additional $50 million in AUM to LLBH.

Consummating that initial transaction yielded a quick bump in assets but was even more valuable in terms of the lessons the firm learned for solidifying its inorganic growth strategy and initiating future deals.

The firm’s acquisition strategy involves seeking transactions that will build scale, support and expand the firm’s growing base of business in the Northeast and southern California entertainment community, and provide options for succession. In order to achieve these objectives, LLBH is open to considering a variety of deal types ranging from lifting out a junior wirehouse advisor to a merger with an equally-sized RIA, and everything in between.

The firm is far less flexible, however, regarding other key attributes that define an optimal deal. “We’ve been incredibly disciplined,” said Jeff Fuhrman, the firm’s COO. During the last two years the firm has considered close to 50 different opportunities. Each was evaluated according to criteria for assessing business performance as well as cultural fit—both areas are considered equally important. On the business side, service approach, client characteristics and quality of personnel factor heavily. With regard to culture, the firm seeks to partner with individuals that have a strong client service ethos and an entrepreneurial mindset. Further, LLBH looks for individuals who are willing to work hard but appreciate taking time to have fun as well.

After carefully scrutinizing many potential deals, the firm may be quite close to finalizing another transaction. Management is in no hurry, however, if it means compromising on the principles that define their optimal transaction. As Fuhrman summarized, “There’s going to be a degree of factors you’re willing to bend on but then some other things that are just absolute…If you’re not moving our way, sorry!”

24

ConclusionWith RIA M&A activity coming to the forefront, now is the time to determine if a transaction is an optimal course of growth for your firm. As these deals continue to gain prevalence, they are set to prove ever more vital to the success and sustainability of the RIA firm.

The most successful transactions will require thoughtful due diligence, vetting and planning. Determining the type of growth you would like to achieve is vital to this planning. Real Deals can be an effective means to achieve scale, dominate your marketplace, strengthen succession plans and broaden firm expertise. The right deal represents the most expedient course of action for gaining your strategic advantage. A purposeful transaction that most appropriately aligns with a firm’s strategic objectives has the greatest chance of achieving high-quality growth that is sustainable and builds value.

AcknowledgementsWe gratefully acknowledge the executives of the following firms who contributed their insights to this report.

Participating Firm Location Participants

Collins Capital Management, Inc. Jacksonville, Florida Sheila Collins

The Colony Group Boston, Massachusetts Michael Nathanson

Edge Capital Partners, LLC* Atlanta, Georgia Harry Jones

LLBH Private Wealth Management* Westport, Connecticut Jeff Fuhrman

Pathstone Family Office, LLC* Fort Lee, New Jersey Steve Braverman

Retirement Strategies, Inc. Jacksonville, Florida Bill Hart

* Clients of Pershing Advisor Solutions


Notes

26

Notes

One Pershing Plaza, Jersey City, NJ 07399GB-PAS-RD-4-15

pershing.com

BNY MELLON

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 36 countries and more than 100 markets. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on bnymellon.com.

PERSHING ADVISOR SOLUTIONS LLC

Pershing Advisor Solutions LLC (member FINRA, SIPC) is an affiliate of Pershing LLC, a BNY Mellon company, and a leading custodian to independent registered investment advisors and dually registered advisors working in conjunction with many of Pershing LLC’s introducing broker-dealer customers. We are committed to providing dependable operational support, robust trading services, flexible technology, an expansive array of investment solutions, practice management programs and service excellence. Pershing Advisor Solutions delivers superior expertise and scalable and customizable solutions to help independent registered investment advisors manage and grow their businesses. Additional information is available at pershingadvisorsolutions.com.

©2015 Pershing Advisor Solutions LLC. Pershing Advisor Solutions LLC, member FINRA, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Clearing, custody or other brokerage services may be provided by Pershing LLC, member FINRA, NYSE, SIPC. Pershing Advisor Solutions relies on its affiliate Pershing LLC to provide execution services.

Bank custody and private banking solutions are provided by BNY Mellon, N.A., member FDIC, a wholly owned subsidiary of The Bank of New York Mellon Corporation. Except with respect to uninvested cash held in a bank deposit account chosen by client as part of a sweep election, assets custodied at BNY Mellon, N.A. are segregated from the general assets of BNY Mellon, N.A.

Trademark(s) belong to their respective owners. For professional use only. Not for distribution to the public.

Real Deals: Achieving Purposeful Growth with Purposeful ... · Real Deals data and the trends they...

Documents

Transcript of Real Deals: Achieving Purposeful Growth with Purposeful ... · Real Deals data and the trends they...