Some potential RIA buyers know they missed the boat: Larry Roth

Veteran dealmaker and CEO Larry Roth has taken a step back from financial advice but is still very active in the industry.  

As the former chief executive of Advisor Group and Cetera Financial Group, Roth ran giant broker-dealer networks during the financial crisis and the bull run in the stock market that materialized afterwards. He’s now managing partner of his own consulting firm, RLR Strategic Partners, and a member of the board of Oppenheimer & Co. Inc., as well as holding other positions in the industry.

InvestmentNews sat down with Roth, 66, recently to get his take on the mergers and acquisition frenzy among registered investment advisors and the buyers, often called aggregators, like Focus Financial Partners Inc., which was recently taken private, and CI Private Wealth, now Corient.

IN: What do you make of today's emphasis on these RIA aggregators versus the broker-dealer merger and acquisition market of 10 to 20 years ago, starting with LPL Financial being bought by two private equity firms back in 2005?

Larry Roth: The RIA buyers have thoughtful, specific plans or frames for the RIAs they buy. And that’s not just the branding, but client services and all that stuff. Those businesses — most, not all — are great businesses.

And the vast majority of the RIA aggregators or buyers do have some sort of a broker-dealer capability to serve their clients. But they don't have the kind of regulatory headaches that come along with a broker-dealer, because they're essentially outsourcing it. Those kinds of firms make a ton of sense.

IN: Are you seeing any flaws in that rollup strategy?

LR: I'm not disparaging them at all, but some names that come to mind are CI and Focus and Hightower. They’ve been buying a bunch of stuff and they’re still kinda sorting it out. They're buying, buying, buying. And the thinking appears to be, we'll figure out later how it all fits together.

Now, that's a little harsh, but some buyers are not as tight on execution in my mind as others, and I think in the end those buyers will be fine. But I also believe they will have plenty of work to do with the firms they buy.

IN: What questions are those RIA buyers going to have to face?

LR: What brands do we want to have? What service models? What pricing structure? There're all kinds of legacy issues, similar to what the big broker-dealer acquirers had to face. It won’t be bad, but they still have a lot of work to accomplish.

IN: Private equity buyers have fueled a good deal of the boom in values for RIAs. Do you see that continuing, or are other new types of buyers going to enter the market?

LR: Right now, in the M&A market, there seem to be fewer bidders on the high end. So if an RIA goes to market now, there might be half as much interest as two or three years ago. At that time, there were a lot more bidders. Some of the private equity investors who really wanted to get into the RIA space, and that’s also true with broker-dealers, have said, 'You know, we're really too late.' Even the big potential buyers are saying, 'We've missed the boat.'

IN: Look into the crystal ball, Larry. What do you seen happening next?

LR: I'm affiliated with the consultancy Bain & Co. They call me an external advisor. I'm seeing two big, big trends. First, there will be more deals coming to market, even though interest rates are high and there are fewer buyers, which we just discussed.

Investors need some clout to go out there and borrow money right now because interest rates are high. The lenders are getting a little more conservative.

And then look at the giant RIA firms that that are private equity-owned, have debt that's being refinanced or debt that is variable-based. Those aggregators are starting to take a closer look at the RIAs they’ve bought and are saying, 'Well, we can't just hang out and figure this all out later. We need to figure out what we must do to rationalize our business model.'

To that end, there will be more consolidation of those RIA entities that are already owned and there will be more changes.

IN: Such as?

LR: That includes changes among senior executives. Mike Durbin, from Fidelity, was brought in last year to run Cetera, for example. And those new people will ask, ‘What are we going to do with this business?’ as opposed to, 'We should just keep buying more RIAs.'