The M&A market within the RIA space has been white hot for the last few years and there are no signs of it markedly slowing down. Given the convergence of several trends – thousands of advisors retiring in the coming years, an influx of growth-challenged RIAs and more advisors seeking the independent model – we’re apt to see a large number of deals for the next decade, according to Cerulli.
As advisors near their sunsetting years or hit a capacity wall in their existing practices, they think about ways to either increase the valuation of their practice or reaccelerate growth. While there are some things that can be done to course correct in the late innings, the true key is a consistent process throughout the RIA’s lifecycle.
The influx of private equity dollars has created a fast-flowing river of M&A activity, and the notion of “RIA aggregation” has remained a key focus of the well-known national RIA wealth platforms. This notion has also broadened beyond them to many others pursuing bolt-on, tuck-in or aggregation strategies. According to Dimensional’s 2023 Deals and Succession Study, nearly 55% of firms are actively looking to engage in some type of M&A activity within the next two years.
Driven by purchasers searching for top advisor talent, the ability to gain prominence or enter certain geographic markets and – ultimately – to grow their firm’s assets, an intermediate M&A strategy has become just as essential to running an RIA as delivering high-quality investment outcomes or organic client acquisition.
But that doesn’t mean any standard acquisition will do. According to the 2023 Fidelity M&A Valuation study, 52% of acquiring firms have walked away from the deal table. Given that, acquisition targets need to make themselves look as attractive as possible and acquirers need to have the infrastructure to generate an attractive return on investment (ROI) even when valuations may appear premium.
The quicker a new firm can be integrated into its acquirer, the faster that acquisition can deliver value to the purchaser and lower the potential of account leakage. To achieve this, firms need to ensure their clients’ accounts move and are invested in quickly to not disrupt client outcomes, but also ensure that speed does not come at the sacrifice of scale. More often than not, model portfolios powered by tax-smart technology can help break through the barriers, facilitating positive outcomes for all stakeholders.
Validation Of Models As An M&A Tool
It’s well known that models and other managed accounts continue to increase in popularity for advisors looking to deliver customized investment solutions. Cerulli found that 77% of advisors are using models in some fashion in their practices and that assets for model portfolios are expected to reach $2.9 trillion by 2026 as these structures can help save time and allow advisors to make more efficient use of their time.
In addition, there is tangible evidence that the intentional use of a models-based framework within an advisor practice can increase a firm’s valuation by providing both differentiation and ease of implementation. Utilizing models not only aligns and scales the investment management process firmwide, but when accompanied with a scaled process, enables “portability” of the investment platform, even when the investments change.
Processes that can continue and expand once the firm has new leadership are a key differentiator.
Processes, particularly related to investments, that can continue and expand once the firm has new leadership are a key differentiator when acquisition firms are looking for a fresh target. Advisors have demonstrated that models can easily align them into the acquiring firm’s existing investment strategy or make change much simpler and more efficient.
Both Parties Benefit
While it’s clear there are strategic benefits for advisors in utilizing models, there are benefits for the acquiring firm as well. Signing a purchase agreement is just the beginning. There is much work to do to complete an acquisition and it is in the best interest of both parties to integrate quickly to reduce friction for the end investor and to monetize the cost of the purchase.
However, there are barriers to this process, including account paperwork, custodial integrations and alignment of investment strategies. The acquirer can use models to create a consistent, repeatable and durable approach to their investment strategy during the transition period and help boost its valuation post-acquisition, as well as generating organizational confidence for the next target.
This makes transactions more productive and economically beneficial for both parties. Having an acquisition target that can be monetized more easily and securely not only makes it a more attractive purchase, but it also makes the transition faster, which may support higher multiples.
Get Smart
Often taxes are a major obstacle that prevents firms from efficiently implementing investment strategies – particularly at key moments when money is in motion. Wealth managers must be able to solve the tax transition problem at scale to facilitate the movement of investments, without compromising the after-tax impact to clients. Advisors should leverage tax-smart technology to quantify the tradeoff between taxes incurred and how closely their clients’ portfolios are sticking to their targets.
Weaving in tax-smart tech and services will help unlock operating efficiency and bottom-line results pre- and post-acquisition.
Weaving in tax-smart tech and services will not only provide stronger client results but will also help unlock operating efficiency and bottom-line results pre- and post-acquisition. Tax-smart tech is also an area that, while growing, still hasn’t achieved full adoption, so firms that opt to go this route have it as a differentiator between themselves and other acquisition targets.
Michael Camp is Head of Client Solutions at 55ip, an independent, wholly-owned subsidiary of JPMorgan Asset Management that provides custom, tax-aware investing at scale.
