RIA has succession plan of its own for smaller firms

One RIA firm believes it has the solution for smaller advisory firms that don’t have a succession plan: it wants to buy them.

“Compliance is getting more complicated, they need to invest in technology, and bringing in potential partners to the existing business doesn’t solve any of those issues,” said Gary P. Wagner, chief operating officer at Carnegie Investment Counsel.

Beachwood, Ohio-based Carnegie, with $460 million in assets, just completed the acquisition of Tower Wealth Management, which managed $100 million in assets. Firms like Mr. Wagner’s, that have the scale to compete, are in a good position to make acquisitions over the next several years, he said.

Firms with between $50 million to $250 million in assets don’t have a lot of good options for succession, Mr. Wagner said. It is difficult for RIAs of this size to execute a nonfamily internal succession plan because would-be younger partners don’t have the capital to purchase a business of this size, he said. Outfits smaller than $50 million tend to gradually fade away as their owners approach retirement, and those larger than $250 million generally attract the attention of so-called roll-up firms that have a process for bringing on many acquisitions, Mr. Wagner said.

Carnegie and firms like it don’t exactly belong in the roll-up category because they are primarily advisory firms that are also marketing directly to investors.

Carnegie sees itself occupying a middle space: It’s a long-established RIA firm that is growing organically and can offer advisers a fiduciary service plan, which other potential buyers may not do, Mr. Wagner said. Carnegie structures its deals over three to five years, with ultimate payouts roughly between one and three times revenue. He estimated that payouts in a wirehouse sale might be roughly between three and four times revenue.

Many financial advisers want to avoid the wirehouse route, he said.

“Owners might maximize their price by selling to a wirehouse, but that would put them in a different model,” he said. “These are fiduciaries, they aren’t going to sell out to a wirehouse model, even if the dollars look more attractive.”

Industry demographics favor firms like his, said Mr. Wagner, who anticipates doubling the firm’s assets under management in the next few years.

Mr. Wagner said there may be a trend towards more firms like his making these targeted acquisitions. “They need to be large enough to have scale, patience and creativity with the owners who want to sell,” he said. “It’s really as much of an emotional decision as it is a financial one.”

Editor’s note: InvestmentNews’ IN Adviser Solutions group recently launched a succession planning study, an industry first, examining firms’ succession planning readiness. To participate in the study, click here.