Inorganic Growth: Big Gains In Revenue & Clients, Done Your Way

The odds are that in the next few years, whether you’re a large firm looking to scale or a small practice looking for a strategic partner, a transaction could well be part of your future.

For the fifth year in a row, M&A activity in the RIA business grew at a solid pace. 

It’s easy to understand why: as RIA firms get bigger and bigger, it’s harder for client-by-client acquisition to supply the high levels of growth they’re looking for; a wave of retirements in the next decade, potentially involving more than 100,000 advisors, could put trillions of dollars of assets into play; and smaller firms are just having a more challenging time competing with the business scale and institutional-style service the bigger firms are able to provide.

As a result, more RIAs are buying and being bought. Wire-house breakaways are getting bigger and bigger. And platform “aggregators” are ramping up their hunt for assets. But the M&A space isn’t one-size-fits-all.

If you’re thinking of selling your practice—either wholly or partially, or if you’re already in the hunt to acquire assets, clients, or revenue, the first and most important thing to understand is this: everybody has a goal, each goal is unique, and not all goals are compatible.

There are plenty of options available for partnerships or M&A. Each option has pros and cons, and finding the right match between partners is key to a long and productive relationship. Whether that’s an outright acquisition or merger, acquiring or selling a minority stake, or simply entering into a revenue-sharing agreement with no ownership transfer at all. The size and scope of these deals are truly unconstrained.

For example, say you’re a big firm looking to be an attractive “landing zone” for a retiring advisor. You must anticipate being evaluated on a wide array of criteria to ensure the target advisor feels safe transitioning over the book of business they spent an entire career building.

If you want to be in the running, your offer must be a tight fit with what they’re looking for—whether it’s institutional-quality investment management solutions, skilled and experienced human capital, deep infrastructure and technology, a strong brand, or a stand-out client service experience. And that custom fit gets more specific the higher up the net-worth ladder you go.

High-net-worth (HNW) and ultra-HNW practices often have clients that need specialty capabilities, like tailored lending, derivative strategies, or private banking relationships. If your capabilities don’t match their needs, then you better look elsewhere for that sizeable chunk of new revenue.

Then again, maybe asset-based revenue isn’t your firm’s goal. Perhaps you just want to grow service revenue by offering a plug-and-play back-office environment for independent advisors. There’s definitely a market for that, as many small advisors actually don’t want to be acquired. They want to keep their brand and their own LLC. They’re merely looking to offload the burden of managing a back office so they can focus on what they do best: acquiring and serving clients.

Again, if you want to be in the running for this market, your offer must fit what they’re looking for. If your capabilities don’t match their needs, then you better look elsewhere for that sizeable chunk of new revenue.

There’s also a wide array of transaction options in between.

Minority acquisitions are gaining popularity, as are RIA/IAR platform relationships. Both structures can be either a long-term solution for both parties or a temporary stop on the way to a full merger or acquisition. Both offer a way to test the waters before a smaller advisor sells their entire book of business to a larger firm or a larger firm “merges in” a new partner.

In minority-stake scenarios, the deal size can range from 20% to 40% of the acquired firm, but that stake can be smaller or larger, depending on the needs and goals of both sides. Similarly, the scope of benefits offered to the smaller firm can be all over the map. At the very least, it usually includes back-office and compliance support. But it may consist of human resources, investment support, financial planning resources, tax consulting, and even physical office space. As an acquirer, you need to know in advance what services and support you’re comfortable offering and how much you think it’s worth. If you’re willing to part with a portion of your firm, how much will you sell, and what do you expect in return?

By contrast, RIA/IAR platform relationships do not include an exchange of ownership. Instead, the independent advisor becomes an IAR of the larger RIA firm, pledging a percent of revenue in exchange for a suite of services. The benefit to the acquiring RIA is that this arrangement is less capital-intensive, easier, and faster than M&A in scaling up revenue. The potential downside for acquiring firms is that, in a non-equity partnership, the IAR can pick up and leave at any point, making the revenue much less sticky, which in turn impacts enterprise valuation.

So, what’s your goal as an acquirer or acquiree? That’s the most important place to start when considering inorganic growth strategies. Are you looking to grow asset-based revenue? Growing service revenue? Reducing costs and offloading administrative burdens? Finding a home for your prized possession—your loyal and valuable clients?

For acquirers, inorganic growth strategies can add revenue or clients in large chunks. And there are plenty of deals to be had in all shapes and sizes. But as an acquirer, you also need to remember that acquirees will likely have as many needs and goals as you do.

If you want the deal to deliver precisely the kind of growth you’re looking for, then it has to be right for both sides.