M&A is like dating so ‘be true to yourself’

In the blink of an eye, 2024 is almost gone, while M&A activity continues at an impressive pace in the RIA world and advisors are continually exploring what constitutes as the best deal and the process to get there.

And with private equity also fueling industry consolidation, it was a topic of much discussion at the RIA Activate event in California last week.

2024 is also on track to be the second-most active year in history by deal volume and assets transacted. Mike Wunderli, managing director at Echelon Partners highlighted at InvestmentNews’ RIA Activate California last week, this can all be credited to the independent space.

“Progress has brought competition level up, which has also made it more difficult to compete because you have to offer more, especially in the high-net-worth segment,” he said while moderating the panel on M&A.

“That has led to smaller and mid-sized firms having to make a decision of whether to acquire and grow or try to stay the same and hold on to their clients,” Wunderli said.

Most larger RIAs already have a private equity backer who are helping them finance acquisitions of their own, Wunderli said, so most of the M&A activity that the industry is witnessing are “tuck-in” acquisitions, or larger platform firms acquiring smaller or mid-sized RIAs.

“That's where we're seeing a lot of deal activity now,” he added.

Panelists emphasized that M&A is no longer just about scale. Rather, it’s a strategic necessity for firms seeking sustainability and growth.

But how does one know when it’s the right time to determine that an acquisition is the right approach for growth?

For some, it simply means knowing yourself.

Sandra Cho, founder and president of Pointwealth Capital Management, said it boils down to having the desire to identify “how you want to grow.”

“You can’t know who your target is or whether you want to do an acquisition unless you really know how you want to grow. Are you willing to take on the additional risk of growth?”

RIAs can also forget the build-versus-buy debate. Jonathan Hoy, chief operating officer of Perigon Wealth Management said there’s significant value that advisors can extract through acquisition, “if you can figure out a way to take what's unique about each acquisition and bring it back to the firm.”

“There’s a lot of value that can be extracted above and beyond client contracts, client fees and EBITDA if people are doing M&A the right way,” he added.

While there’s a lot of “moving parts” to M&A activity, Jordan Greenhouse, chief growth officer at Lido Advisors emphasized that actual growth post transaction tends to be "anemic" in many cases. That doesn’t mean there’s change but “there’s a lot of cultural fits that need to be asked,” he said.

“From our standpoint, what it really comes down to is, do we think there's that multiplier effect if you do make that acquisition or partnership.”

“There's a lot of things that have to align,” he added. “It's not just a simple equation and [a question of] how much is the cost. It's what does the outcome look like on the other end in doing the best job on the front end to provide yourself with the most likelihood of success.”

In terms of what makes an acquisition target more attractive, Greenhouse stressed the importance of transparency and dialogue on the front end.

Additionally, being clear on and understanding what the firm makeup is, identifying the next gen in place and whether it’s more of a succession play can be a big factor in acquisitions.

“Transparency throughout the conversation is critically important to have that batch of effect for future growth,” he said.

Vincent Gimarelli, institutional sales and consulting director at AssetMark, a sponsor of the event, pointed to culture as another deal breaker.

“When there is a union between two firms, you should have like-minded principals and employees that have the same vision and goals, because if you don't have that, it's going to be a challenge,” Gimarelli said. “Culture is such a big piece.”

With the proper union, he added, firms will endure a great client experience with happy employees, resulting in different types of referral channels coming in.

Cho compared M&A to dating, emphasizing that advisors should know what makes them attractive to the acquiring or selling firm.

“If you try to fake it and be the image of someone that you know is going to be attractive to a buyer with the highest price, how long are you going to be able to sustain that image, if you're not being true to yourself?” she said.

“Be true to yourself, and you will attract that buyer [or seller] that you know will be the right fit for you."