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The Difference Between Healthy and Unhealthy RIA M&A

This year’s health crisis should be a wake-up call that appropriate plans are in place to support the long-term health of your company.

Over the past 10 years, the RIA industry has experienced a strong run of healthy M&A. Merger and acquisition activity has been good for the constituents of an RIA: good for the founders, good for the next generation and employees, good for the buyers, and most importantly, good for the clients. These transactions overall have been a win-win-win-win: healthy major strategic moves that benefit all parties.

However, there are near-term and mid-term developments that seem likely to create unhealthy M&A. Both the implications of COVID-19 and the weak underpinnings of succession planning raise warning flags about future merger and acquisition dynamics.

Before emerging symptoms worsen, firms have a window of opportunity to adopt a “vaccination” plan. RIAs can take specific preventative actions to avoid undesirable outcomes for their firms—and for the industry at large.

Historic Bouts of Unhealthy M&A

The industry has lived through periods of unhealthy M&A in the past. When I first began focusing on RIA M&A 17 years ago, M&A activity was essentially a lose-lose-lose-lose situation. Back then, it was common for firms to sell for succession or, more specifically, sell for immediate succession. A typical retirement plan was for an owner to sell their company to the highest bidder and exit the company as quickly as they could—often in six months or less.

These transactions and transitions were executed quickly, with clients and employees dropped into the buyer’s firm without proper planning or consideration. Attrition of both often followed. The buyer also lost in the deal as their investment was eroded by the poorly designed plan.

This is Exhibit A of unhealthy M&A.

The industry went through another bout of unhealthy M&A around 2007 and 2008, when unsophisticated buyers with weak management teams entered the space. They waved big checkbooks and sold a story; but as soon as the stock market tide receded, it became clear that these players weren’t wearing swim trunks. Many sellers later regretted these transactions and had to live through a long and painful rehabilitation.

Key Factors of Healthy M&A

Fortunately, RIA M&A has been much healthier during the past dozen or so years. Exiting advisors shifted their timelines and stayed engaged during a longer transition. They realized this approach was better for all parties, including themselves. They saw they could not only serve their clients more appropriately on the path to retirement, but they could also choose to calibrate the hours they worked and the activities on which they focused. And as a bonus, the economics of the transition were even better.

More recently, the interest in gaining the power of scale by selling to a bigger firm has eclipsed succession as the primary reason advisors choose to sell. This is also healthy M&A. For over two years now, the majority of RIA sellers have improved their businesses and lives by carefully selecting partners who can help them better achieve their business—and personal—goals. Offloading activities to a larger parent with robust administrative, training and technology resources allowed sellers to focus more exclusively on client relationships.

The Return of Unhealthy M&A?

DeVoe & Company is concerned that two emerging dynamics could create a hazardous environment for future transitions. Both of these situations could result in a surge of sellers that exceeds the grasp of the current qualified buyer pool. The old fallacy that there are “10 buyers for every seller” would be put to bed once and for all.

The immediate pressure point stems directly from the virus that is still spreading rapidly across the United States. Eighty percent of fatalities from COVID-19 have been individuals 65 years or older. Disconcertingly, nearly half of RIA owners are in this age group. So, going into the office is now a life or death decision for thousands of advisors. This will have a profound effect on RIAs and succession plans—it’s no longer business as usual. This new normal—where owners are indefinitely managing clients, staff and businesses from remote locations—will likely drive many advisors toward external sales.

Given the 10,000 firms in the industry, that could mean hundreds of incremental RIAs coming into the M&A marketplace each year. The current pool of qualified buyers would not be able to effectively absorb this surge. M&A is complex; transitions are delicate. Today’s sophisticated buyers will have the discipline to say no when their pipelines hit their limits. The music will stop, and many sellers will not have chairs. Valuations will drop, and RIAs will be left without buyers. This is unhealthy M&A.  

The second pressure point is the ever-simmering succession crisis. The lull of transactions related to the coronavirus increases the temperature and is likely to be a full-fledged 104-degree fever soon.

The average RIA owner is currently in their early 60s, and the majority of firms still do not have a written succession plan. DeVoe & Company calculates that the industry has experienced less than half the number of M&A transactions that it should on an annual basis, given its size and dynamics. With year after year of relatively low M&A activity, there is a growing supply of RIA sellers that will simply have to come to the market. Left unchecked, the industry will eventually experience a surge that overwhelms buyer capacity. This is unhealthy M&A. 

Succession Planning Prescription

RIA owners who turn their focus to shoring up their succession plan will benefit their clients, their employees and themselves. The sooner a firm undertakes the succession process, the greater their options in the future. There are clear action steps that can be engaged in immediately.

First things first: If you don’t have a formal, documented succession plan, start drafting one today. Start with the ‘emergency/continuity’ plan, so that there is a path in the event of the proverbial bus. Next, assess if and who on your staff could be your successor(s). Think through who has the technical skills, management potential and leadership qualities. And then crunch some numbers to determine if they can afford to buy the firm—even over a longer period.

If you have a plan in place, make sure it is receiving appropriate care and feeding. DeVoe & Company’s recent Human Capital survey indicated that most firms (57%) expect that an immediate transition to the next generation would be bumpy at best. Your staff needs to be coached and trained on how to transition all aspects of the business. Succession planning is a journey, not an event.

There are a variety of other items and options, but the most important thing is to put things in motion. Regardless of any firm’s situation, this year’s health crisis alone should offer enough of a wake-up call. It’s essential that appropriate plans are in place to support the long-term health of your company—and with it, your clients’ financial well-being.

The more firms that take action now, the more likely RIA M&A will stay healthy in 2020 and for years to come.


David DeVoe is founder and chief executive officer of DeVoe & Company, a leading consulting firm and investment bank serving RIAs. He has been a sought-after thought leader on RIA M&A for over 17 years.

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