Better together? Why not all advisory teams are meant to go independent

Advisers looking for more freedom may find going independent on their own is not as fulfilling as partnering with an existing independent firm

Sep 17, 2018 @ 4:32 pm

By Ben Harrison

For advisers who yearn for independence, going independent on their own can seem like the perfect solution. Advisers are attracted by the flexibility of the registered investment adviser model and the ability to serve their clients in a conflict-free way. They want to be entrepreneurial, create enterprise value and access best-of-breed technology solutions to deliver an optimal client experience.

However, many advisory teams are finding that the most efficient way to gain operational scale and the benefits of the independent model is to join an existing RIA as an owner. Last year, 71 breakaways moved to existing RIAs, representing 17% of all breakaway deals, according to Echelon Partners' 2017 RIA M&A Deal Report. Why?

In part, many advisers who look to set up their own businesses encounter significant hurdles in setting themselves up for success, including building their own infrastructure, technology, compliance, investment platform and operating model. These are not insurmountable challenges, but for some, the benefits of a partnership outweigh going it alone.

In addition, many established RIA firms are recognizing the opportunity to become destinations of choice for breakaway teams. New advisory firm partners are hard to find, and it takes significant due diligence and homework to establish a fit. However, sophisticated firms see the advantage in bringing like-minded teams into the fold to create regional or super-regional powerhouses.

In fact, as we are seeing larger teams break away; "mergers of equals," in which both teams bring significant assets to the table, are becoming more common (rather than traditional "tuck in" deals). In simpler terms, large advisory teams, as well as acquiring firms, are recognizing that sometimes one plus one equals three.

In these mergers of equals, just as in any relationship, there are lessons both sides need to heed in order to be successful.

For breakaway teams: The right partner brings more to the table than just infrastructure and a quick payout. While many advisers believe independence is the key to the business success they seek, finding the right partner can provide a range of benefits beyond having a place to move clients quickly and a ready-to-go service infrastructure. While the payout and/or equity provided by a deal can also provide an immediate reward for teams, the real benefits to be had from a like-minded partner are the added experience and new colleagues to drive growth together.

(More: The benefits of transitioning to independence)

For acquiring firms: It's often your operations that make or break a deal. While "culture" is frequently cited as the reason that mergers fail, many times it's the business model itself that creates friction. Namely, your firm's operations and technology infrastructure need to be flexible enough to be able to plug a high-performing adviser, or team, into the system seamlessly so that they can take advantage of what you have built. Operational challenges have doomed mergers that look great on paper. Scalability is key.

(More: Why operations teams are the unsung heroes behind breakaways)

• For both sides of the relationship: Be honest about your business goals. As more capital finds its way into our industry, it's becoming easier for firms to quickly secure the financing to make a deal. Just because these deals can be made does not mean that they should. It's important that firms are clear about their business goals and how they see their future coming together. Growth is important, but if there is not an agreed-upon strategy and clear delineation of roles, parties can quickly become frustrated.

It's tempting in today's frothy market — where funding is readily available — for advisers to jump at opportunities that can help catapult a firm's assets to higher levels. After all, independent advisers are known for their entrepreneurialism. But it's also because of the wealth of opportunities that advisers on both sides of the deal can be more circumspect and careful about how they pursue their independence.

For both breakaways and independent firms, the benefits of a synergistic relationship can present an attractive alternative to starting from scratch and growing organically. The operating leverage created by utilizing the excess capacity within a wealth management business is a powerful tool. However, as in any relationship, hard work is required to maintain the focus, transparency and flexibility needed to create enduring value.

(More: Going independent: Which business model is right for you?)

Ben Harrison is head of business development at BNY Mellon's Pershing Advisor Solutions.


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