RIAs Turn to Scaling as Growth Outpaces Capacity
Growth may be good. But it’s also causing many registered investment advisors to consider how they can keep pace with frothy valuations, according to Brad Bueermann, CEO of wealth management consultancy FP Transitions, which specializes in firm valuations, compensation programs, and M&A.
“A lot of the discussion is around scaling,” Bueermann said at the Wealth Management Industry Awards Executive Sessions event in New York City. “With the way advisors have been growing the last 2-3 years, there is a lot of concern of whether they can keep up internally in terms of scaling.”
In this video for Wealth Management, Bueermann discusses how RIAs can consider equity sharing, restructuring, or finding “hidden value” within their firms should they pursue a sale.
Read the full transcript:
Mostly, advisors have been coming to us looking for, where is their value right now, how does that value benchmark against their peers, and what do I need to do in order to continue to grow that value over time. A lot of this discussion is around scaling. It’s been really interesting, given the market growth, given how much advisors have been growing the last 2 or 3 years, there’s a lot of concern about whether they can keep up internally in terms of the scale. So focus on compensation systems, on spreading out equity within the firm, and how they even how the firm is set up as an entity and how that will scale over time as they continue to grow, our chief concerns. We help them with all of those things, and so it’s been a busy year.
Well, sure, there’s a little bit of exuberance in the market, and, you know, why shouldn’t there be after several really, really good years, you know, in the market. But at the end of the day, the, the firms that are acquiring or the most active acquiring, and even those that are acquiring even only 1 or 2 acquisitions a year are careful, and they are, they are looking to build out businesses of their own.
And so, when we encounter someone who has read a top line multiple or has started to multiply their value, and now has uh maybe delusions of, of some very, very large dollars, um, it’s best to simply, you know, start to deconstruct where the value comes from, look at their firm, look at it benchmarked against their peers, and then start to discuss that.
I will tell you, the good news is, is is that we actually don’t encounter that many people coming to us looking to sell, who have unrealistic expectations, and in most cases, we actually exceed the expectation that they originally had when they walk in the door. But that’s because what they might be looking at in terms of where they’re internally calculating. Value is not what the market might be looking for. Exactly what’s valuable to the market, what hidden part of their business might be very intriguing, uh, to a buyer and finding, but, you know, look, it always comes down to fit. Uh, you know, there is not one buyer that is right for every seller or vice versa. So, finding that match in the market is incredibly important.
And when the match happens, that’s when. So, let me give you some examples. When you have a match in terms of the style in which they’re advising their clients, when there’s a match potentially in terms of the of the technology that they’re using, when there is a match also in terms of their compensation. Approach to a larger firm who is a potential partner. But remember, all of these people are seeking a partnership. In, in the past, we would have people who were selling, and what selling meant was they were gonna leave the industry. That doesn’t happen anymore. Right now, it’s all about finding a partner who can help you continue to grow more.
And so, the important thing to a, to a potential acquirer is, is that when they’re looking, is this going to be a good match and a good partner for me as, as we continue to grow the firm.
