Minority Stakes, IAR-Only and Other New Affiliation and M&A Models

Extremely Competitive M&A and Recruiting Market Drives New Deal Structures and Affiliation Models for IBDs and RIAs

Michael Madden, Contributing Editor & Research Analyst

When it comes to M&A and recruiting-driven growth, the independent wealth management space is on fire.  How can independent broker-dealers (IBDs) and registered investment adviser (RIA) firms keep the growth party going?  

It all comes down to two key activities:  Acquisitions of high quality wealth management practices, and recruiting of experienced financial advisors with a well-established book of business.

And with so much capital chasing finite deals, and well-resourced IBDs and RIAs hunting more aggressively than ever for a finite pool of recruits, the race for growth is extremely competitive.

But scarcity drives innovation, and that certainly applies to how many firms are rethinking their approaches to both M&A as well as recruiting affiliation models.

The Minority Stakes Are Up

Within the RIA space in particular, there is a rising receptivity among buyers for purchasing minority stakes in RIA firms where the ownership is reluctant to cede control of the business.

Dan Newhall, Managing Partner, Perigon Wealth Management

According to Dan Newhall, Managing Partner and Chief Revenue Officer at Perigon Wealth Management, a San Francisco-based RIA firm with offices across the country and $2.7 billion in assets, “Increasing competition in the acquisition market has led some firms to be more flexible with their affiliation and ownership models.”

For Newhall and his colleagues at Perigon, which encompasses 30 financial advisors, adaptability in structuring M&A deals can be an important building block towards success.

Newhall, who spearheads M&A strategy at Perigon, notes that the firm has achieved a 47% annual growth rate on assets under management since 2017, while its affiliated independent advisors grew assets at 44% in 2020.  

Perigon Wealth Management: 47% growth on AUM since 2017

“Minority stake investments allow acquiring firms to align financial incentives with the target firm, create a path toward a full merger, and allow advisors who aren’t fully ready to give up ownership benefit from the power of an enterprise partner.”

What Do the Numbers Indicate?

Broader industry numbers would appear to validate the increased interest among acquirers in buying minority stakes versus controlling interests in RIA firms.

In its second quarter 2021 RIA M&A Deal Report, Echelon Partners, the wealth management industry-focused investment bank, notes that acquisitions of minority equity stakes dominated the top ten RIA M&A deals as measured by assets under management.

“I eat minority stakes like you for breakfast!”

Caveats and Conditions

But some of the largest and fastest-growing hybrid RIA groups also stress that acquisitions of minority equity stakes in smaller firms are more complex than many buyers might realize.

Lou Camacho, President of Stratos Wealth Enterprises, said, “Buying minority equity stakes in RIA firms in lieu of change of control transactions nicely illustrates the old adage, ‘Just because you can doesn’t mean you should.’”

Lou Camacho, President, Stratos Wealth Enterprises

According to Camacho, whose firm is part of a private equity-backed family of wealth management businesses with $19 billion in total assets, if a buyer is acquiring a minority stake in an RIA as a stepping stone towards a future change-of-control deal, that expectation should be stipulated in the initial sale contract in the clearest possible terms.

“The brutal reality is that any assumption on the part of the buyer that isn’t memorialized in the sale contract is just an assumption – And nothing more.”

Camacho believes that acquiring a minority equity stake in an RIA firm only works for larger RIA businesses that have a fully developed ecosystem of solutions and services that the acquired firm sees value in actively utilizing.

Stratos provides access to asset management, practice management, tech stack, marketing support, human resources and real estate assistance to RIAs in which the firm has acquired a minority stake.

“This means we can afford to be agnostic on whether a minority investment turns into a majority equity stake in the future, because both the RIA we acquire and Stratos are constantly growing together, courtesy of the ecosystem of value add solutions that we’ve spent years building,” said Camacho.

Indeed, many RIA firms could be best served by avoiding the temptations of these kinds of transactions, according to Nathan Stibbs, President of Continuum Advisory, LLC, a fast-growing independent RIA with $3 billion and 20 offices nationwide.

Nathan Stibbs, President, Continuum Advisory LLC

“Minority ownership is just not our focus.  Sometimes companies get distracted by trying to be all things to all advisors.  For Continuum, any acquisition we make needs to part of a broader corporate strategy with clear purpose that allows us the control to execute on our long term strategic vision.”

A Growing Move to IAR-Only?

On the IBD side of the wealth management industry, firms have continued to embrace the broader trend of a mass migration among financial advisors and their clients to a fee-based service environment.

For the past decade in particular, the majority of mid-sized and large independent broker-dealers have formed their own corporate RIA platforms, enabling IBDs to support both commission and fee business among their financial advisors.

Jeff Nash, CEO, BridgeMark Strategies

Jeff Nash, CEO of BridgeMark Strategies, a wealth management consultancy focused on financial advisor recruiting and transitions, said, “The downside for these financial advisors is you still have to pay affiliation fees and meet ongoing, and in some cases more restrictive, regulatory and other obligations to be a licensed securities rep, even if you never do any brokerage business.”

According to Nash, as the recruiting wars intensify, a larger number of IBDs are looking at offering independent financial advisors an “IAR-only” option.  Under this approach, financial advisors can join the RIA platforms of IBDs as investment advisory representatives only.

“What platform to join? Decisions, decisions…”

“This means independent financial advisors can join an IBD’s RIA platform as an investment advisory representative, meet whatever affiliation fees and other obligations are necessary to remain affiliated only with the corporate RIA platform, while having nothing to do with the broker-dealer platform.”

From the perspective of Hank Multala, President of Adviser First Partners, going IAR-only with an IBD could increasingly be the best path forward for smaller RIA firms that are not necessarily seeking to be acquired into a larger entity.

Hank Multala, President, Adviser First Partners

According to Multala, whose firm uses weighted compatibility standards built by psychologists to match financial advisors with a broad range of wealth management firms and financial institutions, “Smaller RIAs must continuously battle to create scale in the face of mounting expenses and complexities.  These challenges need to be met with workable solutions.”

“Aligning with an IBD’s corporate RIA as an IAR is a viable alternative that provides smaller to mid-sized RIAs the capability to maintain their investment strategy and discipline on behalf of their clients while addressing the ongoing anxieties that come with increased complexity and cost.”

As for which IBDs are farther along in offering an IAR-only option, Nash points to Triad Advisors, the Strategic Financial Alliance (SFA), Mutual Securities and Commonwealth.

But not everybody is sold on the ability of IBDs – especially the largest IBDs – to successfully deliver an IAR-only offering.

“For whatever reason, large IBDs have struggled with the concept of supporting fee-only advisors, and that is likely due to the compliance and regulatory complexities facing FINRA member firms,” said Nathan Stibbs of Continuum Advisory LLC.

“The velocity of advisors leaving large IBDs to go fee-only with RIAs will only accelerate.   The benefits of an independent RIA structure are simply too numerous and provide advisors the environment to maximize growth and achieve their true potential.”

Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached via email at mmadden@wealthsolutionsreport.com

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