CFA Institute Magazine

Could M&A Fuel Your Firm's Growth Strategy?

  1. Ed McCarthy

A combination of factors has driven M&A activity to a record level for private wealth firms.

  • Slow client growth and other factors have driven many private wealth forms to focus on client acquisition.
  • For selling firms, the motivation often comes from owners who want to focus on being advisers rather than on running a business.
  • M&A deals reached a record number in 2017, but buyers and sellers need to make sure they understand the acquisition process and how to evaluate the potential for a successful deal.

A Red-Hot Market

Mergers and acquisitions (M&As) can produce growth more quickly than organic methods, and interest in M&As is apparently widespread, as evidenced by high levels of activity. Echelon Partners’ “2017 Echelon RIA M&A Deal Report” reported a “torrid pace” for deal activity among wealth managers in 2017, “achieving a record high deal count for the fourth straight year.” That pace continued into the first quarter of 2018, according to Echelon’s Deal Insights Q1 2018 report.

Peter Nesvold, CFA, president of Silver Lane Advisors, a Manhattan-headquartered investment banking firm that specializes in the financial services sector, agrees that M&A activity in the RIA market is the strongest ever, with 2018 on pace to see a record number of deals. According to Nesvold, all sub-sectors, including asset managers, family offices, and wealth managers, are showing strength, with asset management seeing the largest increase in activity in 2018. In an email response, he cited several factors driving activity in the wealth management segment:

  • Aging demographics of industry principals: The average age of a financial adviser today is 51 years. Nearly 40% of all advisers plan to retire over the next 10 years, and only 10% are under age 35. The demographics are even more skewed among owners of these firms, where the average age is in the low 60s.
  • An increasing need for scale: A decade ago, a wealth management firm arguably might have reached critical mass as assets crossed the $500 million threshold. Today, that figure is arguably north of $1 billion and constantly increasing.
  • The emergence of well-capitalized consolidators: Just five or six years ago, interested acquirers often lacked sufficient cash to complete transactions. Much of this has changed in recent years, which Silver Lane largely attributes to significantly more acquisition interest from private equity firms and family offices. Those organizations have backed consolidators who now have the financial resources to be serious acquirers.

This potent combination of motivation and money has created a sellers’ market. Matt Sonnen, founder and CEO of operations and technology consultants PFI Advisors in El Segundo, California, says there are multiple buyers for every RIA seller. The high buyer-to-seller ratio makes it more likely a buyer will find itself in a competitive bidding situation, with 10–12 buyers for every seller, says Sonnen. Sellers want the “big paycheck,” but it’s not their sole motivation, he says. He maintains that from a longer-term perspective, post-deal client retention is more important to the seller’s payoff. It’s also a critical factor for a prospective buyer and increases the need to ensure a solid fit between the buyer and seller.

These conditions don’t mean that advisers who want to grow by M&A face an easy task. Advisers and consultants who have participated on the buy and sell sides of deals report that transactions are more nuanced and difficult to finalize than anecdotal reports might imply. While the common goal is to do M&A deals that are accretive for both parties, numerous elements must sync to ensure a successful deal.

Does the Shoe Fit?

Identifying the motive for a transaction is the first step to a successful deal, says Nesvold. An older adviser’s desire to cash out and retire is one goal, but sellers can also have non-retirement objectives. These can include shoring up perceived weaknesses in the seller’s business or a desire to move away from operational responsibilities, for instance. (See the sidebar for Nesvold’s suggestions to sellers seeking the right M&A candidate.)

Cultural fit is the single most important factor in any RIA, but it is the also the most difficult element to define and measure, according to Nesvold. Advisory businesses are intangibles-driven businesses; all the value is in the people and the relationships that those people bring. As a result, “If employees aren’t happy, they won’t stay, client service will deteriorate, and value can dissipate rapidly,” he cautions.

But Nesvold recognizes that framing a firm’s culture is difficult, as is ensuring that all parties on the sell side are aligned in their objectives for the transaction. “If there isn’t at least a plurality of opinion among the principals of the selling firm about their own firm and its culture, it’s too soon to undertake the process of merging that business in with another,” Nesvold advises.

Going Big

Sellers typically aren’t seeking access to a buyer’s investment models and portfolio performance numbers, Sonnen maintains. Instead, they often wish to transition from being business owners back to being advisers. Consequently, the buyer’s pitch at a high level should be that it will make the seller’s life easier. “We have HR people; we have compliance people; we have people that are going to manage the technology,” says Sonnen, giving examples of an effective pitch. “You can go back to being an adviser and just focusing on your clients and figuring out how to convert your prospects to clients. It’s, you know, go back to the ‘good old days.’”

As Nesvold notes, the emergence of well-financed RIA consolidators has created large firms that continue to grow through M&A and organic growth; these firms can offer the services that Sonnen describes. United Capital, headquartered in Newport Beach, California, started operations in 2005. As of mid-2018, the firm had grown to $22.3 billion AUM, with 85 offices around the US. The plan is to continue M&A activity with three to five “strategic partnerships” each year, according to Matt Brinker, the firm’s head of acquisitions. United Capital buys 100% of the acquired RIA’s assets, and sellers’ receipt of equity in United Capital is a component of the buyout. Sellers are hired as United Capital employees, so the majority shareholders are also employees. Post-acquisition, the company provides incentives for advisers to grow their businesses and leverage the United Capital platform.

Brinker cites several ingredients for a successful deal. The seller should be motivated to reduce the time he or she spends on operations and want to focus more on growing his or her business and working with clients. United Capital’s role is to help the adviser get out “of the business of compliance and bill pay and payroll and HR and IT,” he says. An adviser must also buy into United Capital’s view of how wealth management will evolve, which Brinker describes as “a function of the shift in consumer demands, the need for integrating behavioral finance and coaching, the level of technology investment, the ability to deliver digital tools, figuring out how to scale our middle and back office.” If a prospective seller doesn’t see the value in this approach and doesn’t want to align with it, “then it makes no sense for us to have a strategic relationship together,” he says.

Minneapolis-headquartered Wealth Enhancement Group is another RIA that has grown rapidly through M&A. The company started acquiring other firms around 2011 and has grown to $9.3 billion AUM, with 18 offices and 244 employees nationally, according to chief executive officer Jeff Dekko.

A key factor in the decision to acquire an RIA is the seller’s business focus, Dekko explains. Wealth Enhancement Group is built around delivering a financial planning experience, and potential affiliates must share that emphasis. “They might hang their shingle and say they’re doing planning, but we want to see some evidence of it,” he says. “We want to see the actual plans, we want to see examples of their process and that it’s a clear demonstration they’re actually following through with that, because that’s a cultural fit. If you get the culture wrong, it’s just the type of transaction that will continue to be painful for a long time and you’ll never really get a chance to integrate.”

Acquisitions are tactical for Wealth Enhancement Group, he adds. Wealth management is a service business, and talent acquisition and retention are essential. Instead of hiring unproven talent and starting from scratch in a target market, it makes more sense to acquire successful firms, Dekko maintains. As a result, Wealth Enhancement Group approaches established firms that are typically in the $300 million to $500 million AUM range. “When you look at those firms, clearly you have talent in that firm and clearly that talent has demonstrated that they can succeed and take care of clients,” Dekko says. “And, so, in a lot of ways we look at it as a way for us to judge the talent as opposed to trying to hire somebody and go de novo.”


Registered investment advisers’ (RIAs’) businesses are firing on all cylinders, with Charles Schwab’s 2018 RIA Benchmarking Study reporting strong performance metrics for the five-year period from 2013 through 2017. Among firms with $250 million-plus of assets under management (AUM), AUM rose by a 10.9% compound annual growth rate (CAGR); revenue, by 9.8%; and (number of) clients, by 5.5%. TD Ameritrade Institutional also found solid results among RIAs in 2017, with median client growth of 8% and median revenue growth of 16%.

However, there is a potential weak spot. Growth rates were roughly two to four times faster for the top 20% of CAGR leaders than for the remaining 80% of survey respondents. Also, client growth has slowed. The 2017 Fidelity RIA Benchmarking Study reported a 5% client growth rate but noted that rate was the lowest result from 2012 through 2016. Consequently, many firms are looking to improve client acquisition, and Schwab survey respondents listed client growth strategies as three of their top seven business priorities.

Let's Not Make a Deal

Cultural differences mean potential transactions don’t always pan out. Willoughby reports that Modera Wealth Management has dropped out of several advanced negotiations, for example. The sticking points involved valuations—the sellers overvalued their firms, according to Modera’s calculations—or disputes over post-transaction control of the new combined entity. “When you merge that smaller firm with a larger firm, there’s a loss of control [for the smaller firm’s owner],” Willoughby points out. “For the most part, where our negotiations broke down was over the smaller firm’s owner’s fear of the loss of decision-making control. When it comes right down to it, they discovered, with some probing from us, what their role would look like and what their decision-making authority would look like in the larger firm. Once they understood that they had to give up a lot of that control that they had enjoyed over the years, they got cold feet.”

Charles Massimo’s experience highlights the challenge of finding the right. His firm, CJM Wealth Management, in Long Island, New York, works primarily with high-net-worth physicians, second- and third-generation family business owners, and affluent families affected by autism. About three years ago, when the firm was managing around $350 million of assets, Massimo began to consider merging into another firm. “I started to realize that the needs of our clients were becoming a little bit more sophisticated, which became more time-consuming on our end,” he explains. “I started to feel that we needed a more enhanced platform and other specialties to be able to make sure that we were meeting the needs of our clients.”

Massimo began selectively approaching firms that he believed had the potential to be a good fit with his own. Those firms generally were slightly larger than his, because he was concerned that merging into a very large firm would force his firm “to fit into their box,” with a resulting loss of autonomy and the ability to grow the firm based on its core values. Some conversations ended quickly; others continued, but none led to a deal.

It wasn’t just a valuation question, Massimo maintains. Areas of disagreement centered around the combined firms’ operations and management and which clients they would focus on. Different investment philosophies were another sticking point. CJM Wealth Management favors passive investments and works primarily with Dimensional Fund Advisors, but the other firms favored more active management. “We couldn’t find a way to implement a hybrid model with some active and some passive,” he says. “If you come from the passive philosophy and then you try to put some active funds or active managers into the same portfolio, it was very confusing for the end-client.”

Massimo ultimately decided against merging and instead signed on with New York City–based Dynasty Financial Partners, which he says gives him an expanded operational platform without requiring him to give up equity or control. “They [Dynasty] have 46 or so networked firms,” Massimo explains. “It really allows us to scale our business by fully leveraging their strategic resources while not having to change the way we do our business. So that, to us, was a huge selling point in wanting to create this kind of alliance with Dynasty.”

Start Early, Move Carefully

While it might be tempting to move quickly in a hot M&A market, Dekko shares the following cautionary advice based on his experiences. First, talk to another adviser or other advisers who have gone through the process, because they can provide valuable insights. Second, sellers should start thinking about any prospective deals earlier rather than later in their careers. The optimal time is probably about 10 years before retirement, he says. He cites the example of a 65-year-old adviser whose average client is slightly older. From a potential buyer’s perspective, that’s not an ideal scenario. “Typically, as advisers get older, they’re not acquiring new clients as rapidly as they were,” says Dekko. “It’s the new clients that keep the age down and that tend to slow in the latter years, and so that aging starts to pick up pretty quickly. The value of that business is not as significant as it might be if you think about it earlier.”

Strategies for Midsize Firms

The mega-RIAs aren’t the only ones growing through M&A: Midsize firms and other financial services companies are also using this strategy.

For example, Modera Wealth Management, headquartered in Westwood, New Jersey, has completed five transactions since 2010, according to Mark Willoughby, CFA, the firm’s chief operating officer. The company now operates in five states and has about $2.5 billion AUM. Deals were motivated by a desire to both capture economies of scale and acquire new talent. “In our view, our transaction strategy isn’t really a transaction strategy: It’s more a hiring strategy, a talent acquisition strategy,” says Willoughby. The desire to stay independent is another motivation. “We felt that as the industry progressed, if you decided to stay small and just grow organically, it will become more and more challenging to stay independent, and that’s one of the things we really want to do,” he adds.

Peapack Private, a division of Gladstone, New Jersey–based Peapack-Gladstone Bank, has become active in the RIA M&A market. According to Peapack Private president John Babcock, the company has completed four RIA acquisitions since 2015. The firm’s strategy and goal are to build a “prominent and pre-eminent private wealth management business in the New York metropolitan area,” he says.

The transactions can be additive or complementary to the organization. An additive acquisition brings something new to Peapack Private, such as entrée into a new locale or access to a niche client segment or a specialized investment expertise. A complementary firm could be one located in the bank’s area that has a similar clientele or an investment approach that meshes well with current operations, for example.

A critical goal in each transaction is to avoid any actions that could disrupt clients. Nothing except ownership changes initially, says Babcock: “The principals of these businesses have built great firms and there’s no reason to mess with that.” Longer term, however, the goal is to develop synergies within the larger organization. To do that, the firm has been reviewing each acquired firm’s operations and processes with an eye on achieving greater efficiency over the next few years.

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