Citywire USA: Deal structures shift to give sellers more certainty
By: Jake MartinPublishing Date: July 23, 2020 Just 25% of deals in 2020 have contained a clawback feature, down from 67% in 2019, according to RIA consultancy Succession Resource Group. RIA sellers are trading higher values on their firms for less risk in M&A transactions so far in 2020, according to consultancy Succession Resource Group (SRG). The search for certainty has resulted in a sharp reduction in deals with contingencies and clawback features since the end of 2019, the Lake Oswego, Oregon firm said in a recent M&A outlook report. While values dropped despite initial expectations for a ‘strong’ 2020, SRG found that just 25% of deals this year have contained a clawback feature, down from 67% of deals in 2019. Meanwhile, 50% of transactions were all-cash deals. SRG helps financial services firms and professionals value, buy, and sell their businesses, as well as plan for succession and long-range transition of ownership. The firm’s RIA clients typically have $1bn or below in assets under management. Despite a short-term decline in revenue through June, values for RIA firms remained consistent, dropping less than 1% through the first half of 2020, the firm said. The average multiple of revenue of 2.72x in 2019 slipped to 2.70x through the end of the second quarter of 2020. SRG said the impact of the Covid-19 pandemic on advisor revenues ‘rebounded much quicker than initially anticipated,’ but that the market volatility will likely serve as a catalyst for advisors who were considering a sale at any point in the next 1-3 years. Kristen Grau, executive vice president of SRG, said she anticipates increased deal volume as early as this summer based not just on the pandemic but increased compliance challenges (Regulation Best Interest, for example), the ‘graying of the industry’ and aging clients, as well as a lack of succession planning. According to SRG, the average advisor age is 55 while the average age of an RIA seller is currently 63. Meanwhile, going into the pandemic, 33% of advisors already expected to retire in the next decade. Brian Lauzon, managing director at investment bank InCap Group, said there continues to be an ‘aggressive appetite’ for acquisitions and that multiples have remained steady for RIA firms in the range of $400m to $3bn in AUM. ‘Leading up to Covid, earn-out periods were shortening and it wasn’t unusual to see a deal with a one- or two-year earn-out,’ Lauzon said. ‘Currently — and we believe going forward — we expect earn-out periods to return to historical norms of three to four years.’ For InCap’s end of the market, Lauzon said all-cash deals have ‘historically been rare’ and will likely continue to be so for the foreseeable future. Disclaimer This article was first published by Jake Martin. The original article can be found here. All rights to the original content are held by Citywire.
RIABiz: Focus Financial CEO pumps brakes hard on M&A market, waiting for a return to ‘normal’ — and buyers of Focus stock bid up price as debt ratio improves
By: Charles Paikert Publishing Date: August 24, 2020 Focus Financial’s deal pipeline is being squeezed this year by the COVID-19 pandemic and soaring RIA multiples, but CEO Rudy Adolf says Focus has the discipline –and the cash–to stick to its business model until the market “normalizes.” When, and if, that happens are big questions at the moment–and whether the new normal will be anything like the old normal isn’t guaranteed. Those questions were central to analysts during the company’s second quarter 2020 earnings call. Adolf used the word “normal” or “normalize” in a recurring mantra on the call, but a quick reversion to the mean may be wishful thinking, says Karl Heckenberg, CEO of Emigrant Partners and Fiduciary Network. “Multiples of six- to seven-times earnings haven’t been ‘normal’ for several years,” he says, “A billion-dollar firm that’s growing is going to get a multiple of at least ten, if not closer to 11.” Adolf didn’t state what a normal market looks like to him, notes Matt Crow, president of Memphis-based M&A valuation firm Mercer Capital. “If RIA valuations are too high, and Focus’s multiple is around 12 or 13, then what’s ‘normal’ for Focus?” So far, Focus has completed only eight deals this year, adding two partner firms and six tuck-ins. Last year at this time, Focus and its partners had already made 21 transactions on their way to a year-end total of 34, the most in the industry. Still, Adolf is willing to sit tight on his business model–and a mountain of cash–until the market turns his way. “We absolutely are committed to our minimum IRR [internal rate of return] target of 20%, which means we continue to be very selective. And of course, our multiple discipline speaks for itself,” Adolf told analysts. “Quite frankly, discipline is our middle name, and this has made us the largest player in this industry,” he reminded analysts. Muted market Focus Chief Financial Officer Jim Shanahan acknowledged that Q2 M&A activity was “muted,” and the firm expects limited activity during Q3. “The pandemic resulted in an industry-wide decline in M&A as prospects prioritized client service over strategic transactions,” he noted. But the M&A market, overall, radically rebounded in July with 13 RIA deals totaling nearly $20 billion of AUM, the largest numbers in those categories for any July, according to Fidelity’s M&A transaction report. A “surge” of acquisitions following the COVID slump has already begun, says David DeVoe, an M&A consultant DeVoe & Co. Echelon Partners is predicting that the number of deals in 2020 will nearly match the record number recorded last year. But at what price? Adolf made clear the market is too rich for Focus, right now. He made no attempt to disguise his frustration about the price Canadian wealth manager CI Financial paid for the Chicago-area RIA Balasa Dinverno Foltz calling it “insane.” “It’s more like international players, sometimes private equity supported players that are — that seem to be way out of sync with typically industry multiples and in what they are doing right now.” The Canadian firm’s US wealth assets have swelled to about $11 billion over the course of a roughly six-month spending spree that landed three U.S RIAs, according to citywire. Indeed, a big factor in the market run-up is the entry of private-equity and deep-pocketed players in the RIA roll-up game. The trend was evident last September when Oak Hill Capital, a private equity firm with roots managing the Bass brothers’ family fortune, bought a stake in Mercer Advisors, the fast-growing Denver registered investment advisor aggregator. Mercer has made six major acquisitions to date this year, according to DeVoe. Goldman purchased United Capital, another RIA aggregator, for $750 million in July a year ago. See: Goldman Sachs readies splashy RIA retail debut as it (likely) adds $24-billion United Capital to $35-billion AUM Ayco for $59-billion 82 office behemoth; months after buying RIA lure from S&P Thomas H. Lee Partners (THL) is trying a different roll-up tack in financial advice — this time aggregating TAMPs that turn insurance reps into budding financial advisors. See: As Thomas H. Lee Partners asserts itself, Dave Pottruck steps down as chairman of HighTower’s board of directors The Boston-based private equity giant, which bought a majority stake (Jan. 2020) in AmeriLife, is the force behind Brookstone Capital Management’s roll up of FormulaFolios, a financial planning and automated portfolio management company. Hightower Advisors has either bought or made minority investments in five firms as has Creative Planning, a major RIA owned by Peter Mallouk, with private equity backing from General Atlantic. In June, Creative said it bought Sunrise Advisors, based in Leawood, Kan., and picked up about $700 million in client-managed assets, according to a news release. It was the firm’s seventh deal in 2020, according to InvestmentNews. Emigrant Partners has done four deals and Captrust, with backing from GTCR, has done three. And CI Financial has become a major new player, having bought three U.S RIAs this year after two last year. Private equity firms, for their part, have participated in 5% of all RIA merger transactions since 2013 and accounted for 26% of the deals as measured by assets under management, according to DeVoe. All of which begs a question: Will the new normal ever return to the old normal? Seller’s market As a pioneer in RIA M&A, it’s understandable that Adolf would long for his company’s youth when it could call the shots in doing deals, according to Matt Cooper, president of Beacon Pointe Advisors, another serial acquirer that earlier this year sold a minority interest to PE firm Abry Partners. “Focus was used to paying six- to seven- to eight-times EBITDA and [that] just doesn’t exist anymore for quality firms,” he says. The mismatch between supply and demand and increased competition “will begin to erode Focus’s M&A market share long-term,” David Grau Jr., CEO of M&A consulting firm Succession Resource Group, predicted earlier this year. Steve Levitt, managing director of Park Sutton Advisors, estimates there are 10 buyers for every seller. Grau believes
When it Comes to Growth, Location Matters
By: Tobias Salinger Published Date: August 6, 2025 When it comes to growth, location matters The role of geography in potential business opportunities for financial advisors can be hard to calculate in exact numbers, but the impact of location is changing in notable ways. Together, the rise of remote and hybrid offices across the industry and the continuing consolidation of registered investment advisory firms have altered the landscape of geographic expansion strategies and M&A deals. Both trends also add complexity to the question of, say, which states have the most potential assets under management in play. In 2024, out-of-state buyers completed a third of M&A transactions, according to the latest annual survey by deal consulting firm Succession Resource Group. The higher prices that those acquirers paid and the fact that out-of-state investors are “becoming more normal” reflect the altered geographic dynamics after the pandemic, said David Grau, the firm’s founder and CEO. In the past, “Very few retiring advisors or sellers would consider a buyer who was not within driving distance,” he said, citing the continuing rise in the share of transactions involving out-of-state buyers. “That’s an absurd figure in a professional service business.” To read the full article, please visit: https://www.financial-planning.com/news/how-geography-ties-into-wealth-management-growth Disclaimer This article was first published by Tobias Salinger. The original article can be found here. All rights to the original content are held by FinancialPlanning.com.
New York State Society of Certified Public Accountants: Structuring the Deal: Taxation When Selling Your Financial Service Business
December 15, 2020 By: David Grau Jr., MBA, and Nicole Frey, CFPPublished Date: Oct 1, 2020 For professionals planning to purchase or sell a financial services book of business, the most common negotiating points are the purchase price, deal structure, timeline, and financing considerations. These are critical points to discuss and finalize before signing on the dotted line. It’s also important to be aware of the effect of the tax treatment on the deal and know the different tax structures commonly employed. If not structured purposefully, the tax treatment of a deal may unintentionally favor either the seller or the buyer and can have a significant impact on the total value received/paid. Depending on what’s been negotiated, the majority of the sale proceeds may be classified as ordinary income or long-term capital gains. Negotiating this early in the process will ensure that the purchase price can be adjusted up or down to balance the benefit. As a result, the tax allocation of the sale proceeds is one of the key elements of a deal structure and should be considered carefully by both parties. Potential Deal Structures To decide which tax structure works best for the deal, the parties will enjoy some level of flexibility as long as they remain within the boundaries of current tax laws and the objectives of the transaction. The first decision that must be made is what exactly is to be sold (assets and/or equity) before discussing how the purchase price should be allocated to a particular asset or equity or both. The following are the two most common considerations: Asset sale In an asset sale, the buyer selects certain individual business assets to be purchased from the seller, with each asset having a specific dollar amount of the purchase price paid for it and allocated as such in the purchase agreement. This includes the following primary categories (in addition to any tangibles that may be acquired): Personal goodwill: client relationships, rights to revenue, the reputation of the business (i.e., the book of business) Restrictive covenants: nonsolicitation, noncompete, and/or no-serve agreement with the seller. Post-closing transition assistance: services provided by the seller, such as assistance with client meetings, phone calls, emails, letters, etc. Equity (stock) sale Rather than buying individual assets, the buyer and seller may elect to make the seller’s business entity (e.g., corporation or LLC) the subject of the transaction and enter into a sale of the seller’s ownership interest in the entity. The transfer of the ownership in the entity allows the seller to transition all assets and the liabilities of the business to the buyer, including all— contracts, permits, licenses, and registrations. Since both an asset sale or stock sale may ultimately result in long-term capital gains tax treatment for the seller, the choice is influenced greatly by the buyer’s preferences and whether there’s perceived value in buying the business entity. Asset Sale: Categories and Tax Treatment The most common deal structure when buying or selling a financial services practice is a sale of assets, versus an equity-based sale. This does vary based on the size of the transaction; deals involving larger firms will more often employ an equity-based strategy to ensure the acquired business remains a going concern. When purchasing the assets from a seller, it’s important to ensure that both buyer and seller agree on how the purchase price will be allocated for tax purposes, and such meeting of the minds should be included in the purchase and sale contracts. Personal goodwill The majority of the purchase price is typically allocated to personal goodwill—an IRC section 197 intangible asset consisting of the seller’s client relationships, reputation, expertise, and abilities. Year-to-date 2020, the average transaction for financial service professionals allocated 93% of the purchase price to personal goodwill, up from 91% in 2019. For the seller, the sale of personal goodwill should generate long-term capital gains tax treatment and be amortizable over 15 years by the buyer. Post-closing transition support Depending on the extent of the seller’s services to the buyer post-closing, compensation for these services can be either included in the purchase price (typically for limited services such as introducing the buyer to the transferred clients) or be paid in addition to the purchase price (for the seller’s expanded involvement post-closing beyond just transitioning clients). As shown in Figure 1, the average transaction allocated 3% of the purchase price to the seller’s post-closing support, though this allocation tended to be greater on smaller deals. For the seller, they want to ensure only a de minimis portion of the purchase price is paid for their transition assistance, as this portion is labor and taxed as ordinary income, subject to Social Security and Medicare taxes. The buyer, however, generally seeks to allocate more of the purchase price to the transition support, as this portion provides them a tax write-off in the allocated amount, pro-rated for the year in which the services were provided. Restrictive covenants To protect the buyer’s investment, the seller will commonly be required to enter into a restrictive covenants agreement (similar to personal goodwill, this too is an IRC section 197 intangible asset), whereby they promise not to compete with the buyer, solicit the buyer’s employees or vendors, or serve any of the clients the buyer purchased from the seller. In exchange for this promise, the seller will receive a portion of the purchase price as consideration, resulting in ordinary income for the seller and a 15-year amortization by the buyer. Because this asset doesn’t produce a tax-favorable outcome for buyer or seller (relative to the alternatives previously described), neither party seeks to allocate any more than would be required to ensure the buyer has an enforceable contract. Year-to-date 2020, the average transaction allocated 3% of the purchase price to restrictive covenants. Not allocating a portion of the purchase price to restrictive covenants may render the provisions unenforceable and otherwise confuse the intended tax result. Tangible assets Tangibles assets, such as furniture and equipment, are not commonly part of the deal since there’s often little to no value to
Why RIAs are Giving Synthetic Equity a Hard Look
March 28, 2025 First-generation RIA owners like those at CGN Advisors increasingly use synthetic or phantom equity structures to give employees access to a firm’s growth while deferring actual ownership. Justin Nichols, managing principal at CGN Advisors in Manhattan, Kan., and his two partners were looking for ways last year to give employees access to the firm’s growth without the “complexities” of making them owners or asking them to pony up what would be steep buy-ins. With the help of a consultant, they decided to set up a program to provide so-called “synthetic” or “phantom” equity, in which employees are guaranteed a share of the firm’s growth at a future date or around a triggering event, such as a sale of the firm, a founder leaving or the firm merging with another RIA. Similar to a deferred compensation program, such as when publicly traded companies issue restricted shares, the setup can also provide a pathway for a younger advisor to eventually put accrued equity toward purchasing a stake in the firm. “We have a bunch of great employees, and we really want to retain them,” Nichols said. “This was another tool in the toolkit to retain and even attract talent in the long term.” According to Nichols, the competition for RIA talent in Manhattan, Kan., is no joke. The firm of 16 people with about $1.6 billion in client assets is located about 45 minutes from Overland Park, Kan., home to mega-RIAs including Creative Planning and Mariner. David Grau, CEO and founder of Succession Resource Group, worked with CGN on the program. The succession consultant said he has been advising on synthetic equity structures for larger RIA firms for years but that it has more recently moved downstream to smaller RIAs. “Now, we’re working with five and 10-person teams, and they’re doing phantom equity,” he said. “They’re contemplating these equity structures that, 10 years ago, would have made their eyes roll into the backs of their heads.” Grau said the landscape has shifted to a place where advisors understand there is value in their firms that they can sell. However, giving ownership stakes, and often voting rights, is not always a fit, particularly if the owners don’t feel ready to cede those things to younger advisors. He said it can also go the other direction, by which a younger advisor doesn’t feel ready to put up a large share of cash to buy in but wants that opportunity in the future. “Talk about your quintessential golden handcuffs,” Grau said. “In an industry where we are all fighting to attract and retain great young talent, you can build a phantom equity plan where they can start to accrue $10,000, $20,000 or $30,000 worth of an equity balance.” The owners can also set the vesting schedule for the equity, meaning it can be flexible in terms of how long it will be illiquid for employees and when it will become a liquid asset. There are also clauses for payouts should an RIA sell to a private equity firm or some other triggering event occur. To be fair, Grau and other consultants are interested in these setups as well because they are complicated and require guidance. However, other consultancies reiterated that they have seen growth in interest and uptake for these types of deferred ownership programs as the RIA market has matured and continues to see waves of capital driving competition for talent. Real Growth Eric Leeper, CFO and principal with consultancy FP Transitions, said synthetic equity is still in its “relative infancy.” However, it is increasingly being used to solve RIA compensation structures that have historically been based on “eat what you kill,” where the advisor is often responsible for business development and serving clients. Today, Leeper sees two factors changing the efficacy of that model. One is that larger RIAs are running more like businesses—with advisors still wanting to be compensated well for their work—and new advisors, on the other hand, prioritizing financial planning and working with clients over business development. “There’s a major issue that the industry has with the division of the role of the advisor being a planner and the advisor being a salesperson,” he said. Advisories must set up structures such as bonuses or deferred compensation to move away from the “eat what you kill” model. The synthetic equity model can provide a middle ground while both owners and advisors prepare for real ownership. “You have an issue of affordability for next-generation talent at the company,” Leeper said. “This is where we really started to lean into synthetic equity.” Leeper said that equity is almost always based on a percentage. For example, a contract might offer 5% of company profits so long as the advisor is a member of the firm in good standing. To design the equity, however, a firm may target a capital value of, for instance, $100,000 five years out and calculate the percentage that would most likely get them to that amount. Leeper also noted the employees could gain a tax advantage from the setup, as synthetic equity is not taxed on issuance as company stock or capital ownership would be. The model, however, does come with some complexity. Synthetic equity structures are regulated under the Internal Revenue Service’s 409A, or nonqualified deferred compensation, which requires specific plan documentation and compliance oversight. On the positive side, Leeper noted, it does not show up as a “contingent liability” on the balance sheet of the issuing firm, as it would if it were a defined benefit or guaranteed payout. That can be particularly attractive for a firm that, at some point, may be looking to sell and wants to show buyers a strong bottom line. Recruiting Tool Brandon Kawal, partner with Advisor Growth Strategies, said his firm has worked with about 24 clients on synthetic equity programs over the past year. He ties the current interest in the structure partly to the aggregators backed by private equity money going after advisor talent at independent RIAs. “Compensation, and then
Carson Group Hires Former Envestnet Executive as CTO
March 10, 2025 Ramesh Vaswani will take over as Carson Group CTO, which has been run by a technology council for the past year and a half. Carson Group, the mega-RIA based in Omaha, Neb., has snagged a senior-level Envestnet executive to run its technology operations after it had been overseen by a “technology council” over the past couple of years. Ramesh Vaswani had been the global group head of engineering, overseeing a team of more than 250 people and reporting directly to Envestnet CTO Robert Coppola. Now, he’ll be joining the $41 billion Carson Group to develop and executive technology strategy across its network of roughly 50 advisor offices and 150 partnered advisories through Carson Partners, its RIA channel, the firm announced Monday. Vaswani is the second senior executive from Envestnet Carson has hired in the past two years. In April 2024, the firm hired former Envestnet chief strategy officer Dani Fava to take the same role at Carson Group, replacing now-CEO Burt White. While Vaswani’s CTO role is not new, he will be the first sole leader of tech operations in about a year and a half. Carson’s first-ever CTO, Nimesh Patel, was hired in 2022 but left in the summer of 2023 for RIA Corient in a move that Carson described as a “mutual separation.” Since then, the firm’s technology capabilities have been run by a four-person “technology council.” Now, Carson execs have decided they’d like a CTO leader to help give its advisors and advisor network access to the best wealth management technology and ensure recruiting competitiveness. “Our mission is first and foremost to create ease and confidence for advisors, and we are building a tech stack and broader technology strategy with that mission at its core,” Fava said via email. “We want to be known as a curator and integrator of the best technology solutions to support our advisors and our technology strategy is designed to do just this.” She added that Vaswani’s career has been focused on “aligning technology goals with business goals for financial institutions, and he has a proven track record of turning those ideas into reality.” David Grau, founder and CEO of advisor consultancy Succession Resource Group, said Carson is a firm that seems to have managed leadership succession planning well, including last year when founder Ron Carson stepped down to be replaced by then-managing partner and chief strategy officer White. Having smooth leadership exchanges is “so impactful to the culture and operations of the firm, and their ability to continue recruiting,” Grau said. “All of those roles require proactive succession planning, especially at a firm of Carson’s size.” Vaswani is leaving an organization going through its own transformation. Envestnet, one of the industry’s largest technology providers, was taken private last year through an acquisition led by Bain Capital. Vaswani had been with Envestnet for over nine years. As group head, he oversaw a team of developers, architects, and analysts focused on automation and efficiency projects, including the adoption of artificial intelligence. In a statement, Vaswani said of the move to Carson: “I’m passionate about aligning business and technology to drive results and I see an incredible opportunity to integrate technology in a way that promotes growth and creates ease and confidence for our advisors.” Former Carson CTO Patel has since moved on to the technology-focused custodian Altruist. In February, tech-focused RIA Savvy Wealth, which recently topped $1 billion in AUM, hired its first CTO with Eric Hurkman, formerly of valuation software firm Carta. Disclaimer This article was first published by Alex Ortolani. The original article can be found here. All rights to the original content are held by wealthmanagement.com.
Wealth management’s evolving take on ‘location, location, location’
February 28, 2025 Wealth management’s geographic landscape is shifting from big cities to the entire country, according to one of the industry’s top dealmakers. Despite the higher shares of population and wealth that drive the number of financial advisors, asset levels and property values in places like New York, California and Florida and other big metropolitan areas, the traditional and simple industry emphasis on cities that have National Football League teams is falling by the wayside, said Jim Cahn, the chair of the Investment Committee and chief strategy officer with Wealth Enhancement. The private equity-backed, Plymouth, Minnesota-based acquirer of registered investment advisory firms has topped $96 billion in client assets while altering its approach to the geographic factors in dealmaking and new client lead generation in particular regions, Cahn said in an interview. “We went to Chicago first, and we also had concentrations on the East Coast, because that’s where there were concentrations of people,” he said. “There are wealth management clients in all parts of the country. You have a lot more advisors, but you also have a lot more people who need advisors. The truth is, there really isn’t a bad market.” However, the location of an advisory firm is one of many factors driving how much potential buyers are willing to pay to acquire it, according to a webinar held last month by M&A consultancy Succession Resource Group on its annual study of RIA transactions. Regional variance in RIA M&A deal prices, 2020-2024 Source: “The Succession Resource Group 2025 Advisor M&A Report” Out-of-state buyers carried out a third of transactions last year, which is a larger share than in 2023, and they paid purchase prices that were 11% higher than the amount forked over by those from the same state. The out-of-state premium was even larger, at 16%, in deals struck between 2020 and 2024, Parker Finot, Succession Resource‘s director of transaction advisory services, noted during the webinar. During that span, RIAs in the Northeast fetched the highest average price multiple compared to yearly revenue, 3.09x, followed by the South (3.07x), the West (2.9x) and the Midwest (2.7x). “We have observed some shifting in a reduction to southern multiples over time, and the multiples of the West and the Midwest regions increasing over time,” Finot said. “That out-of- state price premium does still exist during this time frame. In fact, it was elevated to compared to what we’ve seen in 2024, and we’ve really determined that that was driven by higher price asymmetry in ’21 and ’22 during that period of time when the world was really reacting and acclimating to the post-pandemic reality, working from home, office closures, all of those types of things. There was just a little bit more fervor for these remote acquisitions. But it’s cooled slightly since then.” Regardless, those figures reflected “a broad brush, and individual results are going to vary from across the region, state, county and city levels,” Finot said. How housing data can shed a light on RIA growth A ranking of metropolitan areas with the largest number of homes of above average value per square mile might, then, offer a more precise geographic lens for potential RIA acquisitions or prospective customers. Using data from real estate databases, luxury bathroom product firm Badeloft found last month that Miami had more than double the number of high-value homes per square mile than any other metro area, with 105.44. The other cities in the top 10 — New York (38.03), Las Vegas (26.08), Philadelphia (23.93), Washington, D.C. (17.93), Boston (14.42), San Antonio (14), Detroit (13), Chicago (12.12) and Honolulu (12.08) — had far fewer. Beyond the property-tax ramifications to client’s plans and an understanding of local real estate dynamics, the value of an area’s housing stock won’t sway wealth management dealmakers very much or offer advisors many hints about where to approach prospective customers, Cahn said. Perhaps using publicly available data tracking a home’s value compared to the size of the mortgage could suggest some trends relevant to finding out which households have a large number of savings and investable assets, he suggested. The high property values in an area like Miami may also come with high rates of foreclosure in the bursting of a real estate bubble. And Wealth Enhancement’s clients tend to focus much more on their families, careers, emotional state and involvement in their communities than on buying a pricey home, Cahn said. “How people live doesn’t tell you as much about their investable assets as you might expect,” he said. “For the types of wealth management clients that we’re serving, I don’t think we can rely on a sort of mansion index.” The exurban trend in wealth management On the other hand, Cahn has noticed more deals involving advisory practices from exurban areas and those with local and regional expertise that are sought by clients. For example, Wealth Enhancement’s vast and growing network of independent advisory teams include at least a couple catering to Mandarin speakers in parts of California and Texas, and he recalled how a radio show that was successful in generating new customer leads in Minnesota “didn’t have the outcomes we expected” in Connecticut. The exurban trend extends to areas that are about a two to four hours’ drive from cities like Atlanta or regions such as upstate New York and Charleston, West Virginia that “still identify with the city, but they also have their own identity,” he said. The residents likely root for the city’s NFL team and tell those from outside of the area that they’re from there. Some of those parts of the country are “maybe a little underserved, or have smaller firms that don’t have the depth of resources that we have,” Cahn said. “Understanding your community, understanding how to market your community,” is a critical part of advisors’ value to clients and possible acquisition partners alike, he said. “Being part of the community — not just someone who uses the community — is really critical.” Disclaimer This article was first published by Tobias Salinger. The original article can be found here. All rights to the
How to find the right RIA successor
January 9, 2025 Finding the successor to a financial advisor’s practice requires a complicated mix of the right personality, skills, capital, compensation and — most importantly — time, experts said. The consensus for an adequate number of years to ensure a healthy transition among succession-savvy advisors and M&A experts interviewed by Financial Planning amounted to about five, or even longer when taking into account the difficulties of picking the successor. That’s why more registered investment advisory firms and wealth management companies of all types are devoting resources to developing their talent in-house rather than recruiting it. “This is a big challenge for our industry. The other big challenge for our industry is attracting talent into our industry. So succession planning is key,” said Pradeep Jayaraman, president of Bluespring Wealth Partners, the RIA M&A arm of Austin, Texas-based wealth management firm Kestra Holdings. Jayaraman joined the firm in September after prior tenures with Focus Financial Partners and Goldman Sachs. New tactics for a familiar problem Estimates that more than 100,000 advisors comprising more than a third of the industry’s ranks will retire over the next decade are prompting more firms to consider how they can find successors or carry out M&A deals that lay out the future of their businesses when they’re gone. Besides the structure of the transaction, the thorny and often emotional process for advisors to step down from a business they’ve built over decades and the necessity of capital financing, the choice of the right successor looms as one of the most important questions for all plans and one with massive stakes for client retention. “There’s a lot of succession that’s going to continue to happen across the industry,” said Kris Carroll, a managing director in the Carolinas region of Plymouth, Minnesota-based RIA aggregator Wealth Enhancement Group. In addition to being an adjunct professor at Winthrop University and a second-generation advisor, Carroll has led in-house training efforts at the firm through its “Wealth Enhancement Group University” and a current role coaching practice founders on their succession planning. “The best thing and the thing people need to hear over and over again is, just because you’re not ready to retire doesn’t mean you shouldn’t be thinking about it,” he said. “It’s so interesting that we help other people retire all the time and yet don’t think about the finer points of our own retirements.” To that end, the best time for advisors to begin thinking about their successor isn’t right when they launch their firm — but probably “shortly thereafter,” according to David Grau, founder and CEO of M&A and succession consulting firm Succession Resource Group. Grau also frequently reminds advisors that “you can’t just go recruit it and find a mini-me” to get their successor, he said. In fact, advisory practices that have reached $2 million in revenue or above usually need at least two or even three specialists in particular areas rather than one successor. That means that they should think in terms of a career track similar to those of accounting and law firms and seek interns directly from local colleges who can grow into those roles over time. The next generation of advisors and wealth management professionals “want something to believe in, something to buy into literally and figuratively,” Grau said. In that vein, equity-based compensation can retain advisors for longer-term careers with the firm. The last five years have seen “mass adoption of phantom or synthetic equity plans” aiding founders and successors in addressing a key financial challenge: less-tenured advisors don’t usually have the capital on hand to buy an advisory practice and their more experienced counterparts are often wary at the thought of handing over their firms, Grau said. Deferred compensation based on the value of the company reduces the obligation to get outside capital. “As the firm grows in value they can capture a small portion of that,” Grau said. “They’ve got the ability to buy a little bit of equity or have a down payment without having to pull out of their personal savings.” Lessons from the field Some founders no longer have enough time to work with to set up a successor in that way, though. About nine months ago, a sole practitioner working with 220 client households and about $80 million in assets under management had agreed to a succession deal with Fairfield, New Jersey-based advisory practice U.S. Financial Services. It’s one of 25 advisory practices owned by Bluespring, and the firm has picked two junior partners as its successors while acquiring two other books of business in the past five years, according to U.S. Financial Partner and Managing Director Steven Gallo. Its most recent succession deal presented challenges. “He had an administrative assistant and no other staff,” Gallo continued. “Unfortunately, just as we were getting ready to close the deal, he suddenly passed away. Taking over a practice without the retiring advisor available is an extremely difficult process. Still, we have been able to retain 95% of the clients to date, and we believe that we will continue to grow this practice as we can offer many additional benefits and services to these clients.” Ideally, the outgoing advisors ought to expect a runway of two to three years after the deal — but not much more than that, according to Jayaraman. On the one hand, they’ll want to be introducing the clients to their successor as a way of “being very thoughtful about this on a post-transaction basis and not just saying, ‘OK, I sold my business,’ and checking out,” he said. On the other, founders who wait too long to leave their firms and don’t delegate enough on their way out are falling into what Jayaraman views as the two biggest pitfalls in succession. To smooth the process of going from the first generation to the second (or from “G1” to “G2” as industry experts refer to it), Bluespring has created a “successor academy,” which is a two-year program for about eight to 12 advisors from across its firms who learn together through case studies, coaching sessions, webinars and other content. “Sitting where we are, we do get a good sense of what’s working and what’s not and we’re
The Future of Financial Advisory Firms
Here are the four pillars that stood out to our team as essential to supporting and accelerating high-performance wealth management firm growth. These pillars represent the trends, strategies, and opportunities that will influence independent financial advisors’ success in not only meeting but surpassing their annual growth goals.