The RIA dealmaking environment has been significantly influenced by a myriad of macroeconomic factors in 2023, including inflationary pressures, rising borrowing costs and the ever-present uncertainty surrounding future Federal Reserve rate hikes. As we navigate through these complexities, it becomes evident that this year may mark the first downturn in almost a decade for dealmaking in the RIA industry.
Despite these challenges, there’s a glimmer of optimism. DeVoe & Company’s July report on RIA deals suggests that 40% of industry respondents intend to maintain their current deal momentum over the next six months, while 53% plan to increase their involvement in M&A.
Additionally, data from ECHELON Partners through the first half of the year is shedding light on some intriguing trends – nearly half of all transactions in 2023 involve firms boasting more than $1 billion in assets under management. While projections for total deal volume for 2023 hint at a moderate decline compared to the previous year, which saw 341 completed transactions, it’s evident that RIA dealmakers are still actively seeking opportunities in the market. As we enter Q4, there are promising signs of an uptick in deal activity.
Amid these shifting dynamics, one critical factor is emerging as a linchpin for the success of RIA recruitment and M&A: cultural alignment. Data from a Fidelity RIA M&A study corroborates this sentiment, revealing that a staggering 73% of buyers who chose to walk away from deals did so at least partially due to cultural mismatches.
Of the buyers who walked away, 50% decided not to proceed with acquisitions at least partially because of divergent visions regarding growth strategies and client experience management. The implications are crystal clear – culture is poised to remain a paramount consideration during the due diligence process for RIA deals well into 2024 and likely beyond.
The Critical Role Of Culture In Sustaining Growth And Value
To comprehend the pivotal role of culture in the realm of RIA recruitment and M&A, let’s explore how being aligned on this front influences outcomes and generated value.
Onboarding a new team that shares an aligned vision for growth can be transformative for an acquiring firm. Whether the strategic vision is rooted in holistic financial planning, aggressive expansion or a different trajectory, the integration with the acquiring firm’s existing framework, resources and expertise can yield immediate accretive bottom-line benefits.
This synergy becomes even more potent when an acquisition extends the range of services and capabilities offered, such as adding comprehensive tax planning or estate planning to a firm. The result is not just a one-time boost in profitability, but a foundation for sustained organic growth.
Here’s where the crucial element of culture enters the equation. A seamless cultural transition is not merely a desirable goal – it’s an imperative for the future prosperity of the combined entity. PwC’s comprehensive survey findings drive home this point emphatically. According to the survey, a staggering 82% of respondents who believed that significant value was eroded during an acquisition, saw an exodus of more than 10% of key employees post-transaction. Even more concerning, 65% of acquirers confessed that cultural issues stood as formidable barriers to value creation in their prior deals.
To navigate these challenges effectively, it’s essential to appreciate the unique skills and qualities that new team members bring to the table. Communication also takes center stage during the transition phase. Establishing incentives to ensure that core talent from both sides of the acquisition actively contribute to value creation and overall growth is critical. This includes addressing disparities in management styles, communication strategies and fundamental business principles.
When these critical cultural aspects do not align, the consequences can be far-reaching. Such discrepancies have the potential to impede the merger process and thwart the realization of the full spectrum of advantages that initially motivated the acquisition.
Culture Is A Cornerstone For A Successful Deal
When it comes to RIA recruitment and M&A, ensuring a seamless cultural transition is a cornerstone for success. An analogy to a first date is apt here – it’s essential to engage in transparent and upfront communication early in the relationship to address potential issues before they escalate, especially given the high stakes involved when it comes to business. If the other party is not also asking and addressing these cultural questions, that should raise a red flag.
Effective, consistent communication should be a thread woven throughout the entire process. This includes scheduling regular meetings and check-ins with key stakeholders and ensuring that advisors are well-informed about the implications for them and their clients. By establishing efficient communication channels and working collaboratively to implement the integration plan, disruptions can be minimized, and a smooth transition can be achieved for both organizations.
Firms that recognize the importance of culture will be better positioned to sustain growth and create value, regardless of what the economy and markets throw at them.
Robert Sandrew is the Chief Growth Officer at Integrated Partners, a national financial planning firm and RIA.
