RIA Land Grab

Deals have heated up, but can this rapid pace con­tinue?

Financial Planning - - EDITOR’S VIEW - —Chelsea Emery

THERE’S BEEN A FLURRY OF RIA AC­QUI­SI­TIONS OVER THE PAST YEAR, and the trend shows lit­tle sign of slow­ing. Be­tween 10 to 20 qual­i­fied buy­ers are lined up for ev­ery seller cur­rently, ac­cord­ing to in­dus­try es­ti­mates. And RIAS are will­ing part­ners. So what’s be­hind the M&A frenzy?

From the seller’s per­spec­tive, con­sider the rapid shifts in the tech­nol­ogy and reg­u­la­tory land­scape, Matt Straut, head of Op­pen­himer Funds’ RIA group, told me at Sch­wab’s Im­pact con­fer­ence in Novem­ber.

“Twenty years ago, when I first started to work with RIAS, a large one was $100mil­lion. It was a three- to four-per­son firm. It had an ad­min­is­tra­tive as­sis­tant and a CRM and a phone. And that’s re­ally all it needed,” Straut said. But now firms of all sizes re­quire new tech tools to man­age the in­creased com­plex­ity around tax op­ti­miza­tion, re­bal­anc­ing, as­set se­lec­tion and fees, he noted.

Those tools are ex­pen­sive, Straut said. They must be must be pur­chased, main­tained and lever­aged. Then there are new reg­u­la­tions, which can be costly to im­ple­ment. A deep-pock­eted buyer can be an an­ti­dote.

“If I’m at a smaller firm with fixed costs at X that are go­ing to 2X, and I don’t have in­creased rev­enues to off­set that, I’ve got a de­ci­sion to make,” Straut said. “Do I bring some­one in at yet more costs, or do I merge?”

As for buy­ers, they’re at­tracted like “bees to nec­tar” to RIAS’ re­cur­ring rev­enue, Charles Paik­ert writes in this month’s main fea­ture, “Buy­ing Spree.” Deal vol­ume in 2017 was on track to set a new record ex­ceed­ing 150 trans­ac­tions, ac­cord­ing to the most re­cent data.

Go­ing into 2018, “de­mand to buy is clearly still very strong,” Paik­ert tells me. Even if the stock mar­ket has a sus­tained dip from 2017’s record highs, over­all vol­ume may de­cline, but “good, big firms will re­main in high de­mand and will com­mand high prices,” Paik­ert says.

A re­ces­sion or pro­longed mar­ket cor­rec­tion could throw sand in the gears, Paik­ert says. “But buy­ers think it may work to their ad­van­tage be­cause sell­ers will be more des­per­ate to get what they can while they can,” he adds.

Still, cheap credit has un­der­pinned the boom, Paik­ert cau­tions. A spike in in­ter­est rates could dampen en­thu­si­asm. In the mean­time, how­ever, RIAS must slow down and do ex­tra due dili­gence when work­ing with suit­ors.

“Sell­ers usu­ally are in­volved with just one sale — their own — while buy­ers usu­ally make many trans­ac­tions and are much more ex­pe­ri­enced in M&A,” Paik­ert cau­tions. “So sell­ers of­ten leave money on the ta­ble be­cause they don’t re­al­ize their true value to buy­ers.”

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