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The New Buyers: Familiar Names with Deep Pockets

Why some independent RIAs should consider selling their firms back to the same institutions they broke away from.

There is an interesting trend emerging in the wealth management industry: banks and traditional brokerage firms starting to acquire registered independent advisory businesses. It should come as no surprise—as the proverbial puck heads toward independence with advisors large and small trading their W-2s for 1099s—that we’re seeing more of these two scenarios:

  1. The firms these advisors left—the banks, wirehouses and regionals—are looking for ways to replace the revenue lost from attrition. And more significantly, they see the acquisitions as opportunities for long-term growth.
  2. The now independent advisors are looking for ways to solve things that might be impeding their own growth or ability to fulfill their vision, such as paving paths to succession, monetizing their businesses, offloading the day-to-day minutiae and gaining scale.

While there’s no shortage of hungry and capable acquirers for well run, compliant and growing independent businesses, sometimes the best acquirer can be a big firm with deep pockets, good resources, cutting edge technology, turnkey access to specialists, on-point senior leadership and virtually anything else a business may need for support. Sure, many of these independent business owners left the big firms to break away from the bureaucracy, with lack of control and flexibility, but as they approach a possible sale, they’re at a time in their career where they’re in the driver’s seat.

For the most part, I’m referring to mature businesses where the principals are at least beginning to think about their end game. Many want to monetize their equity. Others have hit a ceiling in terms of growth and know they will need to invest significant money into the business in order to remain competitive. And, in some cases, the excitement of managing the affairs of the business has been lost.

Banking on the Future

In late 2012, First Republic Bank acquired Luminous Capital, a $5.5 billion RIA. The industry looked on with amazement—partly because First Republic paid a staggering amount of money for the firm—but mostly because Luminous, a fast-growing RIA, chose to sell itself back to a bank. Mark Sear and David Hou, along with their $1.7B team, left Merrill Lynch in 2008 and went independent to launch Luminous at a time before it was fashionable to do so. Presumably wanting complete control in building an enduring legacy and a sophisticated multi-family office, the team broke away from a bank. Four years later they became employees of a bank once again.

It’s not crazy and here’s why:

  1. They got to associate with the largest corporate RIA in the country, which brought with it buying power, scale, a robust platform and the ability to invest in their business in a way they couldn’t have done as a stand-alone.
  2. They got a tremendous and tangible referral mechanism for ultra-high-net-worth clients from the bank.
  3. They got to associate with a bank that has a great reputation for service—the so-called “bank of yes!”—and a culture very different from the one they left.
  4. They got a succession plan.
  5. They got a ton of money.

Speaking of Money

In 2012, the partners of Luminous put their business up for bid, which afforded them the opportunity to choose the best buyer—and lots of negotiating power to craft a deal that made sense for them. Making the deal even sweeter, they were valued at a multiple on EBITDA and got to take advantage of preferential tax treatment as a result.

Granted, First Republic Bank is a very different bank than Bank of America, Morgan Stanley or Royal Bank of Canada: different in that it has fewer advisors, less layers of management and uses a third-party custodian. But, it’s still a bank, and the Luminous folks would become employees the second the sale closed. At the end of the day, they got their taste of being business owners, leveraged it to the best of their ability and then gave it back when they were ready.

Sure, independence is awesome: To be able to shed the ties that bind and create a business with your own concepts, with a legacy to pass on to your next generation, is just spectacular. But, for some, the bloom may eventually fall off the rose. It’s at that time when the owner decides he’s reached a point and swings the pendulum back the other way. And being independent affords him the luxury to sell when ready to do so.

Several large brokerage firms have already begun exploring the idea with us, expressing an interest in acquiring RIAs. And as independent business owners start looking at the future, they’re finding answers in the past. While some may look at this and say it feels like taking a step back, others may find some comfort in the familiarity and certainly and the deep pockets that come with it. At the end of the day, if each side can negotiate for their needs and motivations, it’s a win-win.

TAGS: Careers
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