When the coronavirus pandemic first came on the scene in the United States in March, registered investment advisers (RIAs) were fearful that they could see their “practice go from being worth a considerable amount to close to nothing,” said Peter Mallouk, president, Creative Planning, during a roundtable event hosted by JConnelly Public Relations.
Fortunately, those fears about a drop in merger and acquisition (M&A) activity have not materialized, Mallouk said.
“We have had a very rapid recovery in terms of RIA transactions,” he says. “On the buyer side, the disruption didn’t last long enough to push advisers to the sidelines for more than a quarter or two. The buyers, at least some of them, are back.”
Ron Carson, founder and CEO, Carson Group, said many advisory firms have had to rely on technology in order to continue doing business during the pandemic lockdowns. This has forced RIAs to scrutinize their technology and either decide to invest more in it or to consider selling their business. Additionally, with so many advisers reaching retirement age, regardless of the pandemic, the pace of M&A action should remain elevated.
Bob Oros, chief executive officer of Hightower Advisors, said the coronavirus has served as a catalyst to prompt more RIAs and advisory practices to decide to sell. In March and April, as the virus quickly spread throughout the nation, it served as a “wake-up call” to advisers, forcing them to ask themselves if they wanted to be in business independently, he said.
“Do I want to go it alone, or do I really want to go with a partner organization?” Oros asked. “I think this situation has brought a lot of advisers to the point of believing that it is going to be hard sticking it out alone.”
As to what purchasers are looking for in potential targets, Oros pointed to the desire to add scale while securing experienced leadership talent.
“It’s all about leadership teams,” he said. “We’re really partnering with leadership teams, giving them scale in some back-office areas we think are outside the existing client value chain. We’re really trying to empower them to do what we think they do best, which is to serve clients and find new clients. For us, it’s all about working with new leadership teams. If I don’t have a leadership team we can hitch our wagon to, that’s probably not the right fit for an acquisition. That is mission number one.”
Oros noted that his firm also looks closely at targets’ succession plans and the second-generation leaders in a company.
“We think that’s the powerful one-two punch for us to get started,” Oros said.
Carson echoed that point.
“The three things that we look at are culture, culture and culture,” he said. “You can get almost anything done if there is a cultural fit with the team. We spend a lot of time trying to get that piece right.”
In line with culture is the consideration of “partnership,” said Luke Winskowski, head of the Thrivent Advisor Network. “We’re looking for firms that have a shared value set. It has to do with culture, but it’s that shared purpose that really aligns to what Thrivent is trying to accomplish out in the world.”
Jim Dickson, chief executive officer, Sanctuary Wealth, agreed with Carson that culture is important, but said that, beyond this, it is critical to analyze a company’s process.
“We’re looking for a team of people and how they’re integrated across the client space,” Dickson said. “We’re also really looking for what we call ‘G2’—that next-generation adviser.”
With more advisory practices embracing holistic financial wellness and offering benefits to participants beyond just retirement planning, Winskowski said, it is also important to acquire practices that have “a sincere commitment to holistic planning for their clients.”
Mallouk said that before acquiring a firm, he likes “to meet with the entire team, every single person,” which, of course, is not possible to do in person during a pandemic. In fact, Creative Planning just acquired Lenox Wealth Management, which staff members from Creative Planning were able to visit prior to the outbreak of the pandemic.
“But then this outbreak happened, and they were never able to come to us,” Mallouk said. “That was the first deal where that happened. I don’t like that at all. It’s not ideal to marry somebody you have only seen on Zoom.”
As to how coronavirus has impacted valuations, Mallouk said, great businesses with strong growth have been able to weather the uncertainty pretty strongly.
“I don’t think valuations for great firms have gone down at all,” he said. “I also don’t feel like they’re really ticked up.”
Carson agreed that valuations for high-quality firms “have not gone down at all.”
Carson also said he openly welcomes minority investments from private equity firms: “Our thing at Carson is, we’re building a 100-year firm. We’re not building it to sell it. Any private equity money we bring in, I’m going to maintain control of the company as long as I’m around, and I’ve got a strong next-gen leadership group.”