The RIA roll-up market has seen a decade of explosion

Ten to 15 years ago, when the very first group of aggregators, or roll-ups, of registered investment advisers were arranging and completing their first round of M&A deals, there were three pillars in the industry’s mergers and acquisitions landscape, plus one outlier.

The first pillar was United Capital, a centralized platform that absorbed the RIA firms it purchased and renamed them, bringing them under one central brand and technology and investment platform.

Focus Financial Partners Inc. posed a clear contrast to United Capital: The firms it acquired kept their own brand and could even use the mothership as a bank for their own deals.

The third pillar was HighTower Advisors (now spelled with a lowercase “t”), a partnership that relied on stock to entice both wirehouse teams and advisers to leave Wall Street and establish RIAs.

Finally, there was the oddball, Dynasty Financial Partners, which made no acquisitions but provided a service and technology platform focusing, like Hightower, on so-called “breakaway brokers,” those looking to flee Wall Street wirehouses and start their own RIA firms.

Those were original old guard of the RIA aggregator business model. There were other competitors at the time, but those four — United Capital, Focus Financial Partners, Hightower and Dynasty Financial — clearly showed the industry the way to build an RIA network, albeit with hiccups along the way.

They were all led by founders with strong personalities: United Capital’s Joe Duran, Rudy Adolf at Focus Financial, Elliot Weissbluth at Hightower and Dynasty Financial’s Shirl Penney. All were, and remain, passionate about the best way to build a large, nationally focused RIA network.

In some part due to the old guard’s success, the marketplace for RIA M&A networks is currently overrun with players — from brand-new entrants from outside the U.S. to well-established RIAs that suddenly decided to get into the RIA acquisition game. Indeed, over the past 15 years, the RIA aggregator market has exploded, in large part the result of a flood of money from Wall Street, typically via private equity investors.

Large networks of RIAs with tens of billions of dollars worth of customer assets are now big enough to attract capital from private equity funds, which raise money from institutional investors, including state pension funds.

In a broad market hungry for yield, RIAs can kick off cash flows — earnings before interest, taxes, depreciation and amortization — in the range of 20% to 30%, which is like waving a blood red tablecloth in the face of Wall Street’s charging bull.

Instead of the three pillars and an outlier of 2010, and the four leaders of those firms, who often could be sharp-elbowed when asserting that their approach made the most sense, the RIA aggregator marketplace now pitches itself as a somewhat bigger tent with room for more buyers and sellers to play.

“You give kudos to early movers, but at the same time their deals wouldn’t survive today’s competition, which is offering a more benevolent deal structure to the seller, particularly on valuations at the back end,” said Dan Seivert, CEO of Echelon Partners, an investment banker for RIAs looking to sell to a larger network. “And today’s buyer is still getting incredible returns.”

“The trailblazers cut down the path and we laid the cement,” said Dave Barton, vice chairman and head of M&A at Mercer Advisors, which completed seven deals in 2020, not including bolt-on deals at RIAs in its network, called sub-acquisitions, according to Echelon. Referring to the founders of Focus Financial, Hightower and United Capital, Barton said: “Those three — Rudy, Elliot and Joe — had conflicts. It was only one view, and that was their view.”

Like many other aggregators, Mercer Advisors is owned and backed by private equity investors, Oak Hill Capital and Genstar Capital. It started making acquisitions in 2016 and has completed 43 to date. 

“Today, we respect each other’s business model and it’s much more collegial than you think,” Barton added.

TOO PRICEY? TOO BIG A TENT?

The tent is only getting bigger. Last year, 11 different firms, ranging from a pure RIA, Creative Planning, to a bank, Emigrant Bank, and a variety of firms with a history of deal-making, or “strategic buyers or consolidators,” completed 69 RIA acquisitions, according to the 2020 Echelon RIA M&A Deal Report.

That’s to be expected, with private equity money flooding the space, spurring acquisitions of RIAs like never before. 

“There were 75 private equity firms investing in the space in 2008 prior to the economic crash, and that amount has crept up to over 275 firms presently,” according to the Echelon report.

Nearly $120.6 billion in RIA assets was acquired last year by strategic firms, which Echelon defines as those having four or more acquisitions under their belt. While 2020 saw a slight slowdown in the pace of such deals when compared to a year earlier, last year was still a stark contrast to 2013, when experienced buyers bought $12.7 billion of RIA assets.

Meanwhile, some take a swipe at the newer private equity investors in the marketplace for two reasons: They argue that they’re bidding up valuations of RIA firms, making deals in general too pricey to make sense, and they warn of the short-term interests of PE firms, which often look to sell businesses after five or seven years.

Is that the best environment for financial advisers working at RIAs, who are fiduciaries, and their clients?

“We don’t pay the advisers to show up,” said Penney of Dynasty Financial Partners, which is a tech platform for RIAs and not a buyer. “Every one of these aggregator firms pays the adviser to join. We’ve had to earn it. The advisers own all the equity and make more money on our platform.”

On a call in February to discuss earnings with analysts, Adolf from Focus Financial likened some RIA aggregators or roll-ups to “drunken sailors” for buying RIAs at two to three times traditional multiples. “We have seen some very unusual transactions last year,” he said. “We would never do this to our shareholders.”

When Focus Financial Partners opened its doors in 2006, RIAs controlled roughly $1 trillion in assets, which has since grown to $6 trillion, Adolf noted in a follow-up interview.

“It’s a staggering success story, and it continues to be about the entrepreneur,” he said. “We embraced a decentralized, entrepreneur-focused business model and invest in them. Some of our partner firms are larger than the aggregators out there.”

But don’t look for price tags of RIAs to slip anytime soon, one executive said.

“I suspect valuations of RIA firms will be where they are at, or even higher, in the future,” said Kurt Miscinski, president and CEO of Cerity Partners, which has half its equity owned by private equity manager Lightyear Capital. Miscinski pointed to the continued growth in the assets of high-net-worth investors and the aging of the adviser workforce as factors buttressing valuations.

BOUNTY OF CHOICES

Today, there’s a bounty of choices for RIAs looking to sell. But with so many more large RIA networks or aggregators out there, and valuations doubling, what is best for advisers considering a sale?

What’s clear is the overwhelming variety of businesses that are competing for today’s RIA seller. Advisers can sell their firm to a roll-up that centralizes functions like money management and branding or find a buyer who lets them keep their name on the door and run clients’ portfolios. They can sell the entire firm today, or sell a chunk and hang onto the rest, potentially getting a higher valuation on the second leg of the transaction.

“When you aggregate, you buy the RIA and change the business model to fit the buyer,” said Kurt MacAlpine, CEO of CI Financial, a Canadian asset management firm that recently has made a major push into the U.S. RIA marketplace. “CI buys great firms and empowers them to work on the broader CI platform. We focus on people who want to stay in the business.”

As part of a public company, MacAlpine touts CI Financial’s long-term commitment to the market because it, like Focus Financial Partners, is backed by public capital and not by private equity.

“They can sell a majority or all,” MacAlpine said. “Most sell the majority. They keep equity in their own business or take equity in CI.  We’re providing flexibility. What’s the percentage of the firm the advisers want to sell and what’s the rationale?”

Peter Mallouk at Creative Planning takes a different approach.

“Creative Planning is one firm, so if the adviser wants to do his or her own planning, do their own planning and service model and keep the same name, that’s not for us,” said Mallouk, president of Creative Planning, which has one private equity investor, General Atlantic, which owns less than 20% of the company’s stock. “The marketplace is full of abundance.”

WHAT ABOUT WIREHOUSES?

If recent history is any indication, the marketplace will continue to reward RIAs abundantly for the foreseeable future, particularly as the size and capacity of the burgeoning networks draw the attention of Wall Street wirehouses, which are increasingly frustrated with losing top advisers to the fiduciary side of the business.

That would only work to increase valuations for RIAs and RIA networks.

The success of the three original networks cannot be disputed, although some of the more recent entrants would undoubtedly say in private that they could do it better.

United Capital sold to Goldman Sachs in 2019 for $750 million in cash. Focus Financial now has a market capitalization of close to $3.8 billion and its stock is trading in the neighborhood of $47 per share. And Hightower recently recapitalized, paid off its RIA partners and has refocused to concentrate on RIA acquisitions.

“Ten to 15 years ago, if you were a billion-dollar firm, you were a mega-firm,” said Bob Oros, CEO of Hightower. “Having $300 million in AUM meant you were a really large RIA. But today, there’s all kinds of very different shades and flavors.”