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Constellation Wealth Partners' Lisa Crafford and Pat McHugh

Wealth Management EDGE: RIAs Need Organic Growth, Diverse Clientele To Compete In 'Unprecedented' Sellers’ Market

Numerous speakers at Wealth Management EDGE said buyers would want to see that its AUM wasn’t primarily tied to a small number of clients and that its growth wasn’t spurred mainly by the market.

RIA firms looking to offload their practices find themselves in “an unprecedented sell-side market,” according to one attorney who specializes in counseling firms on deals. However, a firm’s success may depend on its ability to show real organic growth.

Ted Motheral, a partner with Potomac Law Group, said he was seeing interest in deals among all levels, from smaller RIAs hunting for succession plan clients to boost their business to the biggest of buyers, like Wealthspire and Carson, who are looking for strong multi-generational succession plans and a diverse client base.

“If they all match up, if you have a strong Gen 2, if you have strong organic growth … you’re going to get multiples in that space,” he said.

But numerous speakers during the first day of Wealth Management EDGE at The Diplomat Beach Resort in Hollywood Beach, Fla., from Motheral and Bluespring Wealth Partners Vice President of Corporate Development Tom Valverde to Pat McHugh, the head of investments with industry-focused private equity firm Constellation Wealth Capital, stressed that organic growth relying on the market wouldn’t suffice.

According to Valverde, when Bluespring assesses a firm’s potential value for a sale, it looks for “true ensemble practices” with a second generation already in place. 

Bluespring would also want to know a firm’s AUM wasn’t resting on a small number of UHNW clients and that its organic growth was based on net clients and net new assets, not just market action. According to Valverde, a diverse client base and organic growth would be the two biggest drivers in boosting the multiplier in a potential acquisition.

“You’re leading with financial planning, or tax planning or other core services, not just investment management,” he said.

McHugh echoed this sentiment, saying the private equity firm looked for partners where the firm’s organic growth was diversified across different channels and sources in the organization to make sure it was scalable (and not unnecessarily vulnerable). He also looked for firms nurturing next-generation talent, calling it the risk to the industry keeping him up at night.

“I’m not saying you should guarantee crazy, outlandish salaries to compete with those other industries,” he said. “But you know the opportunity over 10-20 years in this space is very compelling, and the way to bring that to life for individuals considering this space is being more open-minded about longer-term incentive plans.”

But growth needs to be a proactive process, including budgeting resources, people, tech and time, according to Lisa Crafford, a managing director and head of advisory at Constellation, who said it was getting more challenging to grow without that mindset. 

During her conversation with McHugh, Crafford recalled her prior work at Pershing, where she worked on benchmarking studies and how megafirms would consistently outpace smaller firms in growth as a percentage of the business.

“Those bigger firms were growing because they were investing in their growth,” she said. “They were doing marketing, which is actually a thing, and not just having a website or having a golf outing once a year and hoping people will Google you later.”

However, Allan Boomer took a different approach with his firm, Momentum Advisors, where he’s a managing partner. 

The firm’s growth was steady, but he had no intent to sell, saying he valued the diversity he’d created at the firm and that the partners were all in their forties and not itching to move to the next step. Boomer said they’d never considered shooting for a certain annual amount of asset growth, but were, nonetheless, achieving exponential growth. 

“Growing is a byproduct of doing a lot of the right things, as opposed to having the goal of growing,” he said.

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