PANC 2018: The State of Adviser M&A

What’s the right business model and home for your practice?

These questions were front and center during the first day of the 2018 PLANADVISER National Conference, which kicked of Monday in Orlando.

During a panel discussion aptly titled “The State of Adviser M&A,” Rick Shoff, managing director of CAPTRUST Financial Advisors; Dick Darian, CEO of Wise Rhino; and David Reich, national president for retirement services at HUB International Investment Services, all gave their prospective takes on whether and how the retirement plan advisory industry is undergoing consolidation.

With industry statistics showing that 25% of advisers have changed firms in the last four years, the panelist all agreed that many advisers are clearly in pursuit of the right business model. While their individual firms each take a different perspective on adviser industry M&A, the trio emphasized the importance of differences in business models when it comes to ownership of firm, decisionmaking structures, personnel structures and support, core competencies, product and service focus, and how all of this is evolving.

Responding to some impromptu polling, the majority of those advisers in the audience who suggested they would like to either sell or buy a practice said they wanted to do so within the next one to three years. While the poll was far from scientific, the panelists all said they were not surprised to see such enthusiasm for M&A activity. A second series of poll questions showed the audience was pretty much split evenly on the question of whether they have a formal succession plan or business continuity plan in place today.

Asked to speak generally about the thought processes behind adviser M&A activity, Shoff suggested that “there needs to be a very strong catalyst before making a move is the right thing to do.”

“There has to be a specific, undeniable need you have tried to solve for some period time, unsuccessfully,” he explained. “I would stress that being curious is not a catalyst, and the final decision to either sell or buy a firm—or to enter a new affiliation model—involves both the head and the heart.”

The panelists agreed that it is a good idea, though seemingly simplistic, to force oneself to put the rationale of any M&A transaction into writing. The written plan must answer two key questions: Why aren’t you able to solve an issue on your own? And why do you believe others might be able to help you do this? It is best to do this work well in advance of any planned M&A activity. 

“I started my business because advisers do not know how to answer these questions,” Darian said. “One way to explain this is that the typical advisory firm owner focuses so much more on the practice than on the business. Very few firms formalize their thinking about the practice as a business that could be valued, bought or sold. In my experience, I don’t think many advisers can honestly assess their strengths and weaknesses and compare this with what is available out there in terms of buying or selling capabilities. It’s very complex and very emotional work to do. Many people are not prepared even to understand where they stand today, let alone where they should go.”

When it comes to doing this work, Reich suggested advisers put on their equity analyst hats.

“If you want to start to define what your practice might be worth, the numbers obviously matter,” he noted. “How big is the business, and is it growing, staying the same or shrinking? In my company, importantly, we are also not just looking to buy a book of business and send the adviser packing. We want them to come in and continue those relationships. That is a huge part of the value of any advisory business.”

“Another important point is that any final valuation is not just about the multiple,” Schoff concluded. “Six- to eight-times free cash flow is an average right that we are seeing in new deals, but it varies tremendously based on size of the firm and based on the character business itself. Remember, if you get up to eight-times but you have to whittle down the cash flow to get there, that’s not going to be as good as seven-times with a greater cash flow figure.”