Why these RIA firms are sitting out the M&A trend

Over the past few years, mergers and acquisitions have been on a tear in the RIA space, with deal activity reaching fever pitch last year. Aside from RIA consolidators and serial acquirers, private equity firms looking for opportunities are taking an interest, giving advisor-owners yet another avenue to monetize or achieve inorganic growth for their practices.

Of course, not everyone's keen to jump in. Andrew Crofton, one of the co-founders of Five Eleven Partners, a New York-based family office, said his firm decided to sit out the trend as it works with a very select circle of clients.

"We want to serve and advise wealthy families that would fall in the column of the ultra-high-net-worth category," Crofton explains. "You have different wealth segments: mass affluent, high-net-worth, ultra-high-net-worth ... now we're talking about centimillionaires." 

According to Crofton, the well-heeled clientele his firm serves exhibit particularly high demand for advice, including planning around complex businesses and operating structures, investments, taxes, and estate planning. Addressing those needs requires an A-team of advisor talent, which can be challenging to put together under an inorganic growth model.

"Tucking other advisors in with different diverse books of business doesn't really work for the demographic that we're trying to serve," he says. "We also want to be very selective ... we want to work with families that fit our values and that need what we're doing."

Jason Jackman, CEO at Johnson Investment Counsel, says his firm also opted to stay out of M&A because of its sole focus on clients.

"We just never want to be beholden to anyone whose goals may be different than that of our clients," Jackman says. "We always want to ensure we can take the long term view of our client relationships and serve them in the way they want to be served."

Firms that get involved in M&A, Jackman maintains, run the risk of losing customization and high-touch service. When it comes to PE transactions – the Echelon 2024 RIA M&A Deal Report found PE firms figured in 71 percent of all disclosed transactions last year – that often comes up because of a misalignment between a client's goals and the acquirer's investment horizons.

"The typical private equity acquirer wants to boost profits in a five to 10-year time horizon, [and] tactics to boost short-term profits can run counter to providing strong client service," he says.

Even at the outset, Jackman says news of an acquisition can be jarring for longtime clients. At that point, it'll be crucial for the firm to allay clients' fears, including questions about how they'll be served and what will happen to their existing advisor.

There are several ways things could worsen for clients. Apart from raising fees and cutting costs at the expense of service, private equity owners might push firms into making acquisitions themselves, leading to a poorer client experience as the practice's energy, time, and attention get spread thin.

"When you're gathering assets like some of the larger institutions have for revenue growth, which is fine for the business, it doesn't really always align with the client interest," Crofton argues. "We really want to be tied to our clients and their goals and objectives and values."

Both Jackman and Crofton are quick to point out that M&A can make sense for many firms. Those that have built up significant value in their businesses and relationships, for example, may need a capital provider to address financial gaps associated with transitioning a business to next-gen advisors. Other firms looking to expand their wealth management capabilities may also benefit from the economies of scale offered by quality PE firms.

"We serve clients in such a niche space that private equity becomes less critical," Crofton says.

Meanwhile, Jackman believes his firm sits at a sweet spot of size and scale. While it has a smaller firm's mindset of service, he highlights its asset management capabilities focused on domestic equities and fixed income, as well as its independent trust company that provides customized trust services to clients.

He also points to the ownership and leadership transition process initiated in 2001, when the founder's family sold the firm to a group of employees.

"Our ownership today is very non-concentrated. We have 46 owners out of a total of 160 employees who are well on that path in terms of ownership succession and leadership succession," Jackman says. "We've hired young and developed from within, so we have named leaders and successors in all key areas of the firm."

As happy as he is with his firm's choice to remain independent, Crofton is clear-eyed about the trade-off for its growth in the years ahead. Aside from the firm having to "move a bit slower," he says it will have to be very mindful about giving team members a stake in the firm's future success.

"To be self-funded requires a little bit more patience," he says. "You have to be very thoughtful about how the team participates in the growth of the business and is aligned with the with the quality ownership structure."

Currently, Crofton argues PE players shy away from family offices because of concentration risk: with so much wealth in so few hands, even one client walking out the door can be a meaningful hit to revenue. Still, he's willing to bet on multifamily office models gaining prominence, as well as growth in UHNW families starting to turn more heads in PE. 

"You just don't know what's going to happen in the future. The competitive landscape might gobble us up and make it challenging to remain independent," he says. "The best defense is to be intentional and plan ahead as much as you can, for your clients and your team."