There is no better time for RIAs to sell their practice.
In fact, it’s been a seller’s market for a while. New data from DeVoe & Company recently revealed that 2021 has set the record for RIA M&A activity for the eighth consecutive year, and the year isn’t even over yet.
So, if you haven’t gotten a call from one of the ravenous aggregators seeking to gobble up as many independent shops as they can get their hands on, you will soon. And when you do, don’t let FOMO cloud your decision-making.
I’m not saying that you shouldn’t sell your practice. However, before you begin to negotiate with one of these players, you need to get a look behind the curtain at the secrets that they don’t want you to know. I am a business owner who has recently sold my firm, so I’ve been through it, and I hope to save you from the mistakes I’ve seen many RIAs make when selling.
Potential for an Immediate Negative ROI
Many firms, big and small, generate financial projections that look at how the company may perform in the future given a broad range of assumptions. (These projections are called “proformas” for short.)
The word “range” is the key there.
In the case of the aggregators, it is not uncommon to have one proforma that looks at the most favorable assumptions and produces a set of outcomes that can look attractive, especially when taken out of context. This type of a proforma is often presented to advisors that the firm wants to recruit, or to private equity shops when the firm is seeking investment.
Another set of projections — which are often more realistic — is generated for internal stakeholders and is used to make decisions on budgeting and internal resource allocation.
Of course, there is nothing inherently wrong with making assumptions. As long as everyone is transparent about what is being presented, it’s all fair game. However, it can also hide a problem. Let’s say you are an advisor whose business is valued by an independent third party at an accurate market value. If an aggregator shows you their rosy, ultra-optimistic proforma, then the chances of their business being overvalued relative to your business are fairly high.
And if you trade an asset that is valued fairly (equity in your business) for an overvalued asset (equity in their business), you are generating an immediate negative ROI.
Let’s face it. The bigger these aggregators get, the more likely it is that they're inflating the value of their company and future growth rates relative to what your business is worth. To avoid this trap, focus on the “multiple expansion,” or how quickly you can expect the equity at your new firm to grow in the future.
Organic Growth Is Largely Irrelevant
You’ve heard it all before. Aggregators tout their ability to help you achieve organic growth through their marketing strategies and proactive business coaching.
But the truth is, they don’t care that much about your organic growth.
Aggregators are primarily focused on inorganic growth. Most of their marketing resources are spent on supporting the corporate brand, promoting their leadership team in the media, and other tactics that raise the profile of the firm at large. You may buy the promise that you will have in-house support to grow your individual practice, and it may take you months to find out that the firm’s primary expertise is in selling the larger enterprise.
In theory, it would benefit them to help you pursue a niche and grow organically. In practice, most of them just don’t know how to do that. There are benefits to being a part of a national platform, but not if it forces you to give up your unique advantage.
A Unified Practice Management Model Doesn’t Exist
Many aggregators take a technology-first perspective. Advisors who dig a bit deeper may notice that those shiny brochures are rather light on how their proven processes will deliver comprehensive, unified wealth management services. And most aggregators do not provide coaching for their advisors to get the most out of processes, platforms, or extended teams.
Here’s what we know. Technology is not enough. Talented, dedicated people are not enough. Advisors need comprehensive practice management systems—something sorely lacking in the industry.
We call them CAP systems, which stands for Collaboration, Accountability, and Productivity. Instead of looking for one magic technology to improve outcomes, we take a step back and ask ourselves, “What are we trying to accomplish?” Based on the answer, we then choose the tools that will allow us to build the best ecosystems to deliver on that outcome.
Tech Stacks Are Outdated
Many aggregators that are growing quickly today are nothing more than well-capitalized, fancy skins on top of a national broker/dealer platform.
Their growth may be impressive up to this point. However, once they have exhausted the market internally (i.e., within their own broker/dealer network), they must look outside of the network for new teams.
They also have to become multi-custodial.
Unfortunately, their leadership teams are often inexperienced in working with multiple custodians. This presents a challenge for advisors who are used to their independence, or who are looking for more of an independent infrastructure outside of a legacy broker/dealer systems platform. For them, the trade may not look as good in reality as it does on paper.
The bottom line is that selling your business is not something you do every day. And when you do make the decision to sell, it is important that your team and your business find the right home.
Don’t settle for a team that lacks experience with the tech that best fits your firm and clients, or one that is void of the ability to adapt to a comprehensive, unified practice management model. There are better ways to scale that are far less disruptive to your team and to your clients.
Remember, the only thing that matters for a lot of these aggregators is their bottom line and the financial arbitrage that is being catalyzed by M&A. For you as the selling advisor, it can lead to a life of bottlenecks, challenges, and cultural issues that come along with bringing firms together.
Before you put your trust in a large aggregator, don’t just accept what they are telling you; find out what’s behind the curtain, and listen to your gut. Only you know what’s best for the future of your practice and for achieving the best possible client outcomes.
Patrick Brewer is the president and CMO at WealthSource Partners, an independent RIA firm.