(Paul Yeung/Bloomberg)
Stuart Silverman understands the challenges owners face in selling their RIA. He sold four different businesses before he became president of Bluespring Wealth Partners, a company Kestra Financial formed early this year to acquire RIAs.
“This is their baby. Their clients have become their friends and people they love. No one can do it as well as you, is the perception. But ultimately, it’s like managing a portfolio, you have to know when to sell,” Silverman told RIA Intel.
There is a window of time when it makes sense to sell an RIA and that timing is lost on owners holding out too long. Some advisors are anticipating a rising market will continue to make client portfolios more valuable, generate more revenue, and validate a higher sale price. Others are in denial that after a certain point, their RIA will become a deteriorating business, if it hasn’t already, Silverman said.
The vast majority of RIAs charge clients a percentage fee based on the assets they manage. It can be mighty lucrative. But clients tend to be older than their financial advisor and most RIAs struggle to grow organically at all. So, the day the collective decumulation of client wealth outpaces the flow of new money coming into an RIA, that firm is worth less and less thereafter.
“It's been interesting how many sellers are holding on,” said Kyle Campbell, the vice president of mergers and acquisitions at Independent Advisor Alliance (IAA), a wealth manager that oversees $8.6 billion and is affiliated with LPL Financial.
“Why do you think your business is going to be worth more in 10 years? What makes you think that?” he poses to advisors. “It's interesting to me how many sellers have not considered, what I feel, is just a basic way of looking at your practice.”
For those reasons and others, observers are urging RIA owners to consider selling sooner rather than later.
To be sure, it is self-serving for RIA buyers, like Bluespring and IAA, as well as lenders and others, to encourage transactions that could benefit them. But they argue time is of the essence for all stakeholders; sellers, buyers, and investors.
The broad unwillingness to sell is creating some perverse circumstances in the industry. Owners risk losing a handsome multiple attached to their business today while infatuated with hope for a better one in the future. As a result, internal and external buyers are struggling to agree with sellers on the value of RIAs, a delay that can have its own consequences.
Waiting too long to share equity and higher compensation with an internal successor can jeopardize their ability to afford to buy the RIA, further straining a would-be transaction. Successors might then choose to join another wealth manager over sticking around and gambling on when an owner will decide they want to sell.
The situation has caused meaningful rifts between RIA owners and any internal heir apparent, according to observers. Potential external buyers are even more apt to move on and find another opportunity, even in a seller’s market.
All of the above could disrupt an RIA and potentially harm the client experience. If things get bad enough, some might even leave, compounding those problems.
Those pitfalls might partly explain why few succession plans exist. It’s a tough decision that’s easy to delay acting upon. The overwhelming majority of RIAs (92%) are considering an internal succession plan, according to Charles Schwab’s 2019 RIA Benchmarking Study. But only 13% of firms said developing or enhancing a succession plan was a top-three priority, making it the least favorable.
“I think the disconnect here is that people in our industry really like what they do and they like the clients they do it for. You add recurring revenue on top of it, with a pretty reasonable work week, and the plan becomes, ‘I’m just going to do it for another five years.’ We call it the rolling 5-year plan,” said David Grau Sr., the president and founder of FP Transitions, a consultant to RIAs.
FP Transitions, founded 21 years ago, has done over 12,500 valuations for advisors but in a given year, no two are similar, Grau said.
Some owners call and want a clean break; a sale of their business to another wealth manager and to be retired in a matter of weeks. Others want to at least feel like they are a part of the business but are willing to give up their equity in exchange for relief from their once daily duties.
The advent of lenders offering traditional loans to advisors several years ago has made for better deal structures and it continues to gain traction, said Rob Perry, the chief credit officer at SkyView Partners, a Minneapolis-based company that matches RIAs with a network of banks willing to give advisors traditional loans.
Up until only about seven years ago, advisors in need of money to buy another wealth management business relied almost exclusively on seller notes to finance the transactions. With a traditional loan, an owner typically receives most of their payout upfront and the remainder is held in an escrow account until the other terms of the deal are met, including, for example, the transfer of their clients to the new owners.
“Sellers tend to think they are more important to the business or the transaction than they are,” Campbell said. But banks like to spread the risk of the loan around as much as they can. With money in escrow, the owner is incentivized to help the buyer and complete the transition.
Traditional loans are a sign of a maturing industry, according to Ed Swenson, chief operating officer of Dynasty Financial Partners. “We don’t find it surprising that more traditional lenders are getting into the space. In the next several years we expect to see the private equity and venture capital providers being replaced by more traditional lenders with much lower costs of capital.”
Still, the urgency to at least consider a sale – and new ways to finance them – feels like a mysterious unknown to advisors.
“It has been almost miraculous to see how uninformed the average advisor is. To the point where it made me wonder, are the banks, those traditional lenders, just not spending enough marketing dollars?” Campbell said.
“It’s never been better to get a loan. I think every advisor should be looking at lending as a viable option.”
