Registered investment advisory firms offer "a perfect storm of market opportunity, fragmentation and revenue" for private equity investors, according to a new report.
The investors often credited with
Conventional wisdom held that investors such as private equity firms and other RIA acquirers were "going to get real nervous and shut this whole thing down," but they're instead focusing on "the long game," Brandon Kawal, a principal with
"These are high-margin businesses. These are high cash flow, high-margin businesses. We hear this all the time, like, 'Wow, these businesses are so profitable,'" Kawal said. "If you're running a good business and you're being thoughtful around how you're running your [profits and losses], and you're managing clients' money, which is your core job within these businesses, I think, largely, you can absorb some shock."
What's driving big deals
Private equity firms and RIAs with backers from that sector are capitalizing on that attraction, as demonstrated by major recent deal announcements.
In the first quarter, Focus Financial Partners
This week, Geller & Company, which uses the private equity-backed
The private equity investors see ample reasons to continue their investments in the channel.
RIAs get an average of 82% of their revenue from recurring account fees tied to the value of assets from "sticky client relationships," according to the Cerulli study. On top of that business, they add an average of $6.8 million in assets from six new client accounts coming into the RIA each year.
The number of assets managed by RIAs soared by a compound annual growth rate of more than 13% to $8.2 trillion in the past decade — amounting to 27% of the total across the entire wealth management industry. RIAs had just a 20% share in 2011, according to Cerulli.
"As the number of private equity firms participating in the RIA market grows, Cerulli anticipates that the roll-up model will continue to proliferate," the report by analysts Stephen Caruso, Donnie Ethier and David Fletcher said. "In tandem, the increased number of investors will coincide with a rise in aspiring RIA acquirers, creating an inflection point where investment capital moves downmarket and smaller RIAs turn into buyers, when in some markets, they'd be considered sellers."
Dealmaker tips
For financial advisors entering into RIA M&A discussions in these conditions, dealmakers say it's paramount to have a clear understanding of the firm's goals with any transaction and the need to find a partner that is aligned with the same objectives.
Similar views on "client experience, on your growth strategy, on how much you believe in technology" and other areas like investment philosophy are a "good green flag," Raj Bhattacharyya, the
"It's very important to both sides to ask, 'Who is your ideal client, and what is your ideal client experience?' And if those two things do not align at least 75%-80%, it's probably a red flag for both parties," Bhattacharyya said. "Every buyer and every seller out there has a certain client experience and what it means to be a client of their firm. That doesn't change overnight. And, just because you've bought someone, sold yourself to someone, merged with someone, if that is not going to be the same going forward, likely the clients will leave and then, likely, that should have been a red flag."
The team led by Marc Cabezas,
"They have a firm understanding of where they want to take the business, what's the future vision for the firm," Cabezas said. "As an investor, it's then easy for us in the relationship-building process to focus all of our time on how can we align our resources and capabilities with that vision to help them accelerate their ability to get to that future state faster, cheaper, and really in a more sustainable way than going at it alone."