To Buy or Recruit? Dealmakers Say Consider Client Retention
As the mergers and acquisitions market for registered investment advisors matures, so do the structures and options available to both buyers and sellers. According to a panel of M&A experts at RIA Edge Austin this week, that also raises the question of how firms should approach one of the industry’s more consequential decisions: buying an entire RIA versus recruiting advisor teams away from existing firms.
During the session, panel moderator Adam Lewis, a partner at the law firm Vedder, asked about the differences between buying and recruiting as drivers of inorganic growth.
Nitay Laor, director of strategic growth and acquisitions at Chicago-based Mesirow, said a firm should start by defining its priorities.
“Are you looking to duplicate existing capabilities—just growing with more advisors—or are you looking to solve for gaps in capabilities that you don’t currently have?” he asked the advisor audience.
Laor, whose wealth division at Mesirow has about $15.2 billion in assets under management, said acquiring an entire RIA typically entails a higher upfront purchase price and requires forethought and management over the ensuing years. The advantage is that an acquisition offers a cleaner path for client transition, since the full book of business moves over as part of the deal—but with that move, integration may become a sticking point.
“There would be a cleaner transition of the clients because all the clients are coming with the RIA, or buying the assets of the firm, but the integration may not be perfect,” he said. “The RIA may have certain technologies or custodians or processes that they would like to keep rather than adopt what the acquiring entity has.”
Recruiting a team, by contrast, tends to come with a lower upfront cost and fewer concerns about adjustment beyond training them on your systems and processes. The issue here, Laor noted, is a greater risk that some clients won’t follow.
“The client retention there is a little bit more risky—it’s not as clean,” he said. “But on the other hand, the customization, or the idea of transitioning everyone over, is much easier because they cannot stay under the old custodian and technology and processes, so they’re moving to what you have.”
Laor said Mesirow, like many other larger firms, pursues both strategies depending on the specific opportunity. But he cautioned that acquirers running a mix of deal types need to resist a one-size-fits-all integration playbook.
“If you’re considering doing something like this, you should think about how [to] customize your integration approach, because having to customize every integration can cause delays in operation,” he said.
When it comes to client retention in an acquisition, the panelists agreed that negative consent—where clients are notified and presumed to consent unless they object—is the ideal setup for a transaction. Lewis noted that it has, at this point, become an industry standard, with a 30- to 45-day notice window for the client.
“The preference is always to have a negative consent process,” he said. “But if there’s a firm with [a mix of] consents, negative in some and affirmative in others, you might have to deal with it. If you can clean that up pre-marketing your company, that’d be great.”
John Orsini, director of investment banking and consulting at Marshberry, stressed the importance of proactive client communication to reduce surprises and risk, even within a negative consent framework.
“We encourage [sellers] to do outreach,” he said. “Let clients know this is going to happen, talk to them about the added benefits they’re going to receive. … It reduces and mitigates some of that risk of [a client] waking up and saying, ‘What happened?’”
No matter which way firms go, Orsini told the audience that the dealmaking pipeline, while maturing in due diligence processes, is still booming and will likely remain so for both acquisitions and recruited teams.
“I believe firmly that the market is as strong as ever—we aren’t seeing any decrease at all in activity,” he said. “There certainly is increased time within transactions as acquiring firms, private equity-backed primarily, are becoming more and more focused on the things that matter to them, looking for alignment in advance of a transaction.”
He cited MarshBerry data showing a roughly 4.6% year-over-year increase in announced transactions among firms with more than $100 million in AUM through the third quarter, with that pace continuing into October and expected through year-end.
Ryan Kaminski, a co-founder and partner of investment bank Green Sail Capital Partners, added that the broadening buyer pool has created a sweet spot for sellers in the $500 million to $1 billion range, since firms above $1 billion now command premium pricing, making them expensive add-on targets.
“Firms in the billion-plus range are trading at 18 to 19 times EBITDA—very expensive to acquire,” Kaminski said. “Multiples are also elevated in this half-billion-to-a-billion range … right now, from a pure multiple standpoint, it’s never going to be better than the current market.”
Kaminski, who previously worked in other industries including software and consumer sectors, noted that lower-middle-market firms in those sectors typically trade at “high single-digit multiples” even when highly successful—underscoring how elevated RIA valuations remain by comparison.
On the sidelines of the event, Kaminski said he sees wealth management valuations as “something of a bubble.” He said it’s not akin to the housing crisis, but he does expect a “decay over time” in multiples as the large consolidators further dominate the market.
“I think over time, because you get these mega-RIAs, I don’t see why they would keep paying these massive multiples for a relatively small growth deal,” he said. “In a lot of other businesses, the delta between a mediocre to a good business might be six times EBITDA to nine times EBITDA. In this industry, it’s in the mid-teens, and you have to think that eventually it will probably shift.”
