An Array of Models
Keeping up with the merger and acquisition (M&A) activity surging through the retirement plan advisory industry is no small task. In just the last year, leading independent registered investment adviser (RIA) firms such as Blue Prairie Group LLC and Sheridan Road Advisors LLC were acquired by larger financial service companies and employee benefit providers seeking a foothold in the retirement plan space. At the same time, national RIAs such as CAPTRUST have been buying up smaller retirement and wealth-focused shops across the country, announcing multiple deals, it seems, quarterly.
Amid this activity, independent shops seeking to remain solo continue to affiliate with entities such as GRP Advisor Alliance and Resources Investment Advisors LLC. These firms offer scalable back-office support and access to many of the client-facing solutions a CAPTRUST can bring to bear.
For advisers assessing their own practice’s future—perhaps for succession planning or to stay profitable against larger and better-resourced competitors—this landscape can seem quite daunting.
Asked to share advice with RIAs facing these or similar challenges, top executives involved in ongoing M&A activity all agreed that independent advisers should take time to learn about the varied practice development opportunities in today’s evolving marketplace. They also agreed that the pressures for scale will increase, and only boutique firms with the strongest interpersonal client relationships can expect to be doing business as usual in five or 10 years.
“There’s a business-model learning curve that still has to be addressed by many advisers,” says Vince Morris, president of Resources Investment Advisors and founder of Bukaty Companies Financial Services in Kansas City, Kansas. “In conversations with advisers, I often hear they cannot articulate the difference between what Resources does as a provider of back-office services and solutions, what an aggregator firm such as CAPTRUST does, or what a strategic acquirer such as Hub International does. They tend to lump us all together as ‘aggregators.’ That’s true in a sense, but it misses the point that the models and opportunities for growth are very different.”
Strategic Acquisitions
Roughly speaking, there are three main camps of aggregators that influence retirement adviser practice designs in a profound way. All exist on a spectrum by no means precisely defined. First are the “strategic acquirers,” which buy RIA firms outright and airlift the retirement practice straight into a large and established financial services or employee benefits organization.
Recent examples are when insurance brokerage Hub International Ltd. purchased Sheridan Road, or when wealth management firm Cerity Partners LLC acquired Blue Prairie Group.
Ty Parrish is a former Blue Prairie Group executive and now a partner and practice leader in the retirement plan services group at Cerity Partners, in Chicago. He notes that, with 95% of the integration complete as of this July, his firm was able to keep much of its original identity, while obtaining the backing of a far larger staff, new technologies and access to new markets.
“This is no accident,” Parrish says. “We were actually acquired in part because, while Cerity Partners did have some retirement assets already, it wanted to bring onboard a super-strong institutional process for growing this business into the future. As a result, we were able to basically keep everything we do while gaining so many new resources. We didn’t have to lose our stripes with this new parent. Of course, it’s been a give-and-take, and we have learned much from Cerity Partners, as well.”
Parrish hastens to note that his firm received acquisition offers from entities that could not pledge to leave so much of the Blue Prairie Group culture and process in place, and his firm was, in this respect, quite selective in deciding to go with Cerity Partners. Advisers approached by strategic acquirers will have to think hard about wanting to retain their firm’s identity and processes, Parrish says, adding that one non-obvious upside of its joining a strategic acquirer was that lower-level staff now have much more opportunity for career growth than would have been possible had Blue Prairie Group remained independent.
“Like other firms in this space, we have a lot of young and talented people on our staff,” Parrish says. “At some point, in an independent advisory shop, these people can top out—how do you keep them excited about staying in the firm if they have no further room for career growth? Moving into a big entity such as Cerity Partners has opened up many new pathways for our team, whether they are investment analysts, client relationship managers or working in IT [information technology].”
According to both Morris and Bill Chetney, CEO and founder of GRP Advisor Alliance in San Diego, RIAs acquired in this way are being paid “incredible multiples” for their practice. They say this is a function of the strong U.S. economy and the deep interest among strategic acquirers in accessing lucrative new markets.
“The multiples being paid for these well-established practices are absolutely enormous,” Chetney says. “If you look back at the early 2000s, when a previous round of significant RIA consolidation occurred, acquirers were paying out, on average, roughly five times a firm’s earnings. Today, I commonly hear that firms are getting eight times and even 10 times earnings. In this sense, I think outside money has become a big driver of the industry’s M&A activity.”
RIA Aggregators
The second broad camp of acquirers that can help RIAs evolve their practices for the long term are the true aggregators; CAPTRUST, in Raleigh, North Carolina, is a recognizable example. This model resembles the strategic acquirer approach in that a larger organization purchases and integrates the smaller, independent RIA shop. Yet, when the larger firm has an existing leadership presence in the retirement plan industry, M&A activity is more about building scale than buying access to a new market.
Rick Shoff, managing director at CAPTRUST, explains that a big motivation for his firm to acquire RIAs is to bring retirement plan and wealth management businesses together. In fact, according to Shoff, marrying the two markets is a main driver of the fast pace of M&A activity today—and will be at the heart of most independent RIAs’ decisions for how to further develop their practice. Do they want to remain pure retirement advisers? And if yes, are they confident they can stay profitable doing so? Shoff says, besides seeing their retirement margins squeezed, many pure-retirement firms are being asked for wealth management-type services by their clients, leading them to ask whether now is the time to break down the traditional divide between these two sides of the advisory business.
For independent RIAs merging into CAPTRUST or another aggregator, the benefits and drawbacks are similar to those in the strategic acquirer model. The acquired firm gains much more centralized support, as well as potential access to new markets and service capabilities, while formally handing over significant control to the home office.
“There are many firms that are really good at the institutional retirement adviser space and have built great businesses,” Shoff says. “There are also many firms really good at the wealth management space and have built really good businesses there. But there are still few firms that do both really well and do both with scale. That’s what CAPTRUST is seeking to build right now.”
For context about its plans for future deals, CAPTRUST has a goal to be generating $400 million in annual revenue by 2026.
“We believe we’ll have probably 1,100 employees by that point,” Shoff says. “To this end, we have some additional pending deals we hope will close by the end of the year, in addition to the ones we have recently announced with McQueen, Ball & Associates and Cornerstone Capital Advisors. It’s a very active and exciting time.”
As with the other firms that have joined CAPTRUST recently, Shoff says, the acquisition conversations concerning these two did not start randomly. Instead, CAPTRUST staff leveraged existing relationships to get the ball rolling. In this respect, independent firms that want to join the likes of a CAPTRUST will have to do more than just sit and wait for a knock on the door.
“I think traditionally there has been an industry perspective that it’s the investment bankers or M&A consultants who go out and drive much of the acquisition activity,” Shoff says. “While that may be true for other acquirer firms, it hasn’t been true for us. With almost all of the groups that have joined us in recent years, the discussions started because we had some existing relationship with their advisers. For us, relationships still matter.”
Adviser Networks and Alliances
Independent practices that want to remain that way but are concerned about their competitors’ increasing growth and sophistication may turn to the third main camp of aggregators, which are more accurately described as “adviser alliances” or “adviser affiliation networks.” Resources Investment Advisors and GRP Advisor Alliance are two examples in this category.
“We’re here to support those independent advisers who know that more and more services are being demanded by the end clients—by participants and plan sponsors,” says Morris about Resources Investment Advisers. “For adviser teams to be able to keep up with that kind of demand at the same time they’re seeing margin compression, they have to have some kind of scalable support. It’ll be a matter of survival.”
For independent firms, the outsourcing of the back-office tasks allows for a redirection of time, energy and focus back into the things that matter most for building a business—the interactions with clients and prospects. Morris says succession planning also usually becomes a big part of the discussion when independent RIA firms ask for more information about what it would mean to work with Resources Investment Advisors.
“We have positioned ourselves as a niche player that can provide an interim step prior to considering selling the practice to a strategic acquirer or an aggregator,” Morris says. “Working with a firm such as ours, you can get access to the sorts of client solutions that the main competitors in the marketplace—say a CAPTRUST firm—will have. We also put together a succession plan that means we’re there to back you up in case something unexpected happens. Independent RIAs that want to remain independent find this combination very attractive.”
“Working with us is also about building and maintaining a practice that can deliver something that’s really valuable to clients,” Chetney says. “In the last decade, the adviser community has had great success in promoting plan outcomes through the use of automatic enrollment and investment features.
In an interesting way, this success has brought the focus back on the need for genuine one-on-one advice. Unfortunately, we all know, the economics of delivering this advice are so challenging. This is why you need some kind of scalable support solution that allows you to get back out there and talk to people.”
While the alliance approach offers the most flexibility when it comes to choice of business model and brand, some degree of centralization and sacrifice of control is always necessary in order to gain from economies of scale. Morris and Chetney say independents may at first feel uncomfortable outsourcing key processes of investment monitoring or client communications, but they will quickly see the benefit of having more time and resources to devote to real advising.
“We support 28 different brands in the advisory marketplace, and they have no problem remaining unique and pursuing their own specific value propositions,” Morris says. “If you think about it, independent broker/dealers [B/Ds] such as an LPL or a Raymond James have been doing this sort of thing forever—running in the background supporting advisory businesses. What we’re trying to do is to provide this kind of support but to do it from the RIA perspective, rather than from the broker/dealer perspective.”
Can Shops Remain Fully Independent?
Chetney, Morris, Parrish and Shoff generally agree that the retirement advisory industry of five or 10 years from now will look much different than the landscape today—and that now is the time for independent shops to figure out which route to take.
“I think we’ll end up in a barbell situation as an industry,” Morris suggests. “We’ll still have some of the smallest shops that haven’t made the national stage that still have fully independent, niche retirement practices. They may be able to survive based on the strength of their local key relationships. That’s probably the only part of the market that could be somewhat insulated from the scale pressure, given those very personalized relationships.”
Middle-of-the-road advisers will likely face the biggest issues about remaining competitive while staying independent, Morris says. “I’m thinking about the midsize shop that maybe won an RFP [request for proposals] against some nonspecialist competition five years ago, but now the next round of RFPs is coming, and this time it’s going to be competing directly with the national players or with another local shop now tied into a national player. I expect you’ll see the middle-of-the-road firms accumulated or merged.”
“There aren’t any absolute answers here,” Chetney observes. “Independent shops may remain successful if they really carve out their niche.” —John Manganaro
Art by Chris Buzelli