One RIA firm thinks that 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.
Carnegie, with $460 million in assets, just completed the acquisition of Tower Wealth Management, which managed $100 million in assets.
Firms such as Mr. Wagner's that have the scale to compete are in a good position to make acquisitions, he said.
Firms with between $50 million and $250 million in assets don't have many options for succession, he said.
It is difficult for registered investment advisers 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, Mr. Wagner said.
Outfits smaller than $50 million tend to fade away as their owners near retirement, and those larger than $250 million often attract the attention of so-called roll-up firms, he said.
Carnegie sees itself occupying a middle space.
It is a long-established RIA firm that is growing internally and can offer financial 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. Mr. Wagner estimates payouts in a wirehouse sale to be roughly between three and four times revenue.
Many 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,” Mr. Wagner 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 toward more firms such as 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.”
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