Some of wealth management’s top dealmakers met this week to share tips, insights and cautionary tales with potential sellers and other industry professionals this week during a two-day conference organized by DeVoe and Company at the Ritz-Carlton in downtown Chicago. Run by founder and CEO David DeVoe, the firm is one of the nation’s top M&A consultants to SEC-registered advisory firms and the annual invite-only event represents a coveted opportunity for potential sellers.
Mergers and acquisitions activity in wealth management continues to break records year over year, according to quarterly research conducted by DeVoe, setting the space apart from the rest of the national economy where market volatility and the rising interest rates have slowed dealmaking in nearly all other sectors .
Deal volume in the wealth management space is expected to remain at unprecedented levels over the coming years, executives at the conference predicted, due primarily to industry demographics (mostly aging principals looking for an exit plan and monetization of their ownership), and available capital from investors who still see the RIA space as a good long-term bet.
Yet both buyers and sellers of registered investment advisory firms are evolving the approach to potential marriages. Several of the panelists at the DeVoe & Co. M&A+ Succession Summit pleaded the need to focus on professionalism and best practices, and bemoaned the bad behaviors they still see too often in the rapidly changing landscape.
Virtually every buyer on every panel stressed the importance of sellers needing to set clear goals for what they want to get out of a deal before they put themselves into the market. “There’s certainly not a lot of clarity with the sellers in terms of what they want to accomplish,” said Bob Oros, CEO of the highly acquisitive RIA aggregator Hightower Advisors, who was speaking on a panel with Mercer Advisors’ David Barton and Sanctuary Wealth CEO Jim Dickson.
“The three of us represent very different models,” he pointed out. “In theory, the three of us should never be the final firms in a process—we’re just that different. Yet it’s not that uncommon to find firms like us together at the end.”
This could mean that sellers are simply more open to the various acquisition models, Oros said, but it’s more likely that they’re looking for a specific valuation, with too little thought to the other components of the deal that are much harder to fit together . Having a well-defined end goal in terms of desired structure, culture, capabilities, roles and expectations is a good place for any seller to start, agreed the buyers, and can save all players a considerable amount of time, money, energy and aggravation . This includes reasonable expectations regarding the value of one’s business.
“If you’re a seller, you’d love us to look at your business based on the 12/30/2021 run rate,” he said, referencing a time period when markets, and the revenue of RIAs which charge a percentage on assets managed, were climbing steadily. “If you’re a buyer, you’re not gonna do that. But, at the same time, is pegging you against June 30 fair?”
Oros said he is seeing both sellers and buyers coming to the market unprepared and with unrealistic expectations, and that this is adding to the amount of time it is taking to complete (or abandon) a transaction.
“It’s much different today,” agreed Barton. “Due diligence is much deeper now, much deeper. And in a post-pandemic world, in-person meetings are paramount. You can’t rely on Zoom calls exclusively to get a deal done. You’re doing home visits because you want to see how the other firm operates. So, the lead-to-close timeline has extended and there’s more due diligence going back and forth. There’s a lot of reverse due diligence going on now that never occurred before, which is good.”
During the first keynote address, Allworth Financial co-founder and CEO Pat McClain talked about the need for transparency throughout the entire process. “Your regulatory record really, really, really matters,” he said. “Your background and your U4 is super, super important.”
Whether a firm is open and transparent about such things can make or break a deal at any stage, said McClain. “I have dropped two firms in due diligence because they weren’t transparent enough,” he said. “One was a day before we were supposed to close.”
“If you’ve got some problems, you better bring them out into the open pretty early in the process, because they will be found,” he said. “It doesn’t mean that a firm won’t do a deal with you just because you’ve got issues in your past. But if you’re not transparent about it, that’s a big-time problem.”
DeVoe himself gave a brief talk on the second day of the conference outlining pitfalls and strategies for first-time buyers. He highlighted the importance of having well-defined plans for succession and employee retention, and characterized heightened competition among smaller buyers as a cautionary tale to those without thoughtful and well-structured deal strategies.
“It’s a steep hill to climb,” he said. “You want to think methodically and work through this equation or you’re going to end up spending a lot of time and energy and you’re not going to get a deal done.”
“What I’d encourage you to do is not to be an aspirational buyer, but become a qualifying buyer,” DeVoe said. “Sellers want to see a structure in place and want to see you come in and say, ‘Hey, this is how it’s going to work. Here’s 12 different components of our deal structure, and these four are flexible. Let’s talk about it.’ That’s going to create the confidence that you’re going to need in order to convince the seller that you, as a first-time buyer, are going to be able to get this transaction done.”
DeVoe stressed the importance of bringing equity into the mix with next-generation succession planning, governance and decision-making. “You want to create clarity around how this works,” he said, “and you can get really creative with governance. Don’t be shy about sharing or selling stock,” he said, even if it means an owner ends up with less than 50% of the equity. “You can still have guardrails in place that you can continue to make the decisions you need to make,” he said.
He added, however, that it is unrealistic to sell even a minority stake to an external investor and expect that nothing will change. “They’re not going to give you millions and millions of dollars and have no control,” he said.
DeVoe also suggested having a clearly defined incentive compensation plan, something he estimated that more than 40% of firms have overlooked, noting the importance of talent retention and engagement to a firm’s overall and continuing value.
“Starting to think through and write those future chapters of what your company could be, what your own professional roles and responsibilities could be within the firm and your employees’ roles,” he said, “is really foundational to having a great plan. These sort of rich, softer thinking elements are foundational to achieving a succession plan, an external sale or an acquisition that is really going to unlock the value of your firm.”