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The current state of RIA M&A activity seems to be a hot topic in the press these days.  While rising interest rates and a slowing stock market are sure to dampen the record-breaking pace of acquisitions we’ve experienced over the past 8 years, mergers and acquisitions are far from over.  Buyers must understand that success in the M&A arena goes way beyond simply securing financing at a local bank.  Sellers will expect buyers to have dedicated full-time internal resources driving their inorganic growth strategy and a compelling Advisor Pitch that answers the question, “Why would someone want to join our firm?”

As market participants reevaluate their appetite for RIA acquisitions, we thought now was a good time to review the common drivers leading buyers to enter the M&A arena in the first place.

Organic growth has slowed in the past few years

This is possibly the most common reason buyers enter the M&A market.  About a year ago, Charlie Paikert wrote a fantastic article for Family Wealth Report titled, “Are RIAs Addicted to M&A?”  In that article, he speaks with Hightower’s Bob Oros, who points out that most RIAs are not growing organically.  When you back out market gains, many firms are only growing in the low single digits, or not at all, Oros says.  The article then quotes David Devoe as saying, “Many firms struggle with organic growth.  The average growth rate (ex-market) is around 5 per cent.”  DeVoe then concludes, “There’s no way firms can match the growth they get through acquisitions.”

With a constant barrage of information being thrown at our potential clients, their defense mechanism, oftentimes, is to simply ignore all incoming marketing messages.  Where a newsletter or email campaign may have converted sales in the past, it’s becoming increasingly more difficult to break through the noise and stand out in a crowded marketplace vying for consumers’ attention.   And don’t even think about cold calling — no one, including myself, will answer a call from an unknown phone number anymore.

Many RIAs are faced with a real dilemma: as their client base continues to get older, they are consuming their portfolios, rather than contributing to them.  This means RIAs need to add new assets every year just to keep their AUM-based revenue flat from the year before, not to mention if they are hoping to grow their businesses!  If organic growth strategies aren’t converting any longer, many RIAs have turned to M&A to bridge the growth gap their firms are experiencing.

Talent acquisition

We have discussed the talent shortage and the impact of The Great Resignation on the RIA industry on our blog, during conversations with RIAs on the COO Roundtable podcast, as well as inside the Human Resources learning path inside The COO Society.  For the first time in its 16-year history, Schwab’s latest benchmarking study, released in the fourth quarter of 2022, cited “Recruiting Staff” as the #1 priority for RIA firms.  It seems that every RIA in the country is looking to hire not just one position, but multiple roles within their organization, all while employees are going through a self-evaluation process where they are questioning where in the country they want to work, how hard they want to work, and for whom they want to work for!

On Episode 38 of the COO Roundtable podcast, Trevor Phillippi of 6 Meridian quantified the struggles RIAs are having right now:  he spelled out that in the Fall of 2019, they posted an operations position, and 50 applicants applied.  In the Fall of 2020, they posted for a client service associate, and 12 applicants submitted resumes.  In the summer of 2021, they posted another client service associate, and they only received 4 applications, and none were qualified for the role.  And, Trevor pointed out, they kept that posting up longer than any of their other ones, and still couldn’t find qualified applicants.

Just as RIAs are turning to M&A to acquire new clients, the same holds true for employees – if you can’t seem to find them through traditional employment channels, turning to M&A may be the solution to your talent shortage.

Acquiring a service offering or specialty

As we discussed above, organic growth is slowing at many RIAs who are struggling to stand out in the crowded marketplace.  One way to attract more clients and to win additional wallet share from existing clients is to expand your service offering.  If the seller possesses a unique service that the buyer doesn’t currently have, rather than building it internally, the buyer can look to acquire that specialty through an M&A transaction.  For example, if the buyer’s client base is primarily athletes and entertainers, and the seller has developed a specialty in family office services, a merger of both firms could be a match made in heaven.  By bringing the seller’s specialty in-house, the buyer can now offer these services to their existing client base.

Another example could be a unique marketing strategy…some sellers have perfected digital marketing or have a successful podcast or radio program that can attract new clients.  For buyers facing slowing growth, these additional marketing strategies can be very valuable.

Everyone else is doing it, shouldn’t we?

Unfortunately, this is a more common driver of M&A activity than all of us care to admit.  I should rephrase…this is a common driver of firms first entering the M&A arena, but if this is a firm’s primary driver, they probably aren’t producing a lot of actual activity, as buyers with a formal plan and well-defined strategic objectives will likely beat them out when courting sellers to their organization.  Nevertheless, FOMO is real, especially when it comes to RIA M&A – many RIAs attempt an acquisition simply because they see the headlines every week and think, “We want more AUM – let’s do what they are doing!”