Small RIA Owners: How to Address Your Escalating Costs and Complexities

These rising costs are cleaning us out!

Beyond “Change of Control” Exit Deals, Small RIA Owners with Continued Career Runways See Advantages of Tuck-In Deals with Large RIAs

Are you making solid business decisions?

With each passing year, leaders of RIAs with under $150 million in assets seem to spend more and more time consumed by operational details and less time doing what they became financial advisors to do – serve their clients. 

Meanwhile, custodians are taking a hard look at whether the revenue these small RIAs generate justifies the costs of serving them.  What’s the result?  Some custodians are pulling back, leaving their small RIA clients underserved and unsatisfied – Even as the complexities of operating as an independent RIA keep multiplying.

It’s enough to make small RIA owners throw up their hands and try to find a fundamentally different way to do business. In this environment, “tuck-ins” – which involve an independent RIA giving up its registrations, and having its financial advisors become investment advisory representatives (IARs) on a larger RIA’s platform – are increasingly appealing. 

While “tuck-in” deals aren’t new, they are more in demand because they can address the pressures that many small RIAs are feeling in the current environment, without completely altering how they prefer to work.

Tuck-ins can be structured in a way that enables the small RIA owner to maintain control and cohesion of the business, while still allowing for the possibility of a change-of-control exit down the line, when the time is right. 

What do you want your final working years to look like?

Many independent financial advisors, after years of labor building their businesses, reach a point where they seriously think about how to ease the day-to-day pressures of operating a business.  This is especially the case with smaller RIAs, particularly if they are one- or two-advisor shops in which the lead advisor has overseen operations, compliance and other critical functions on his or her own, while also servicing clients.

For these advisors, the question is simple:  How do I want my final working years to look like?

From there, the thought process tends to move towards how the advisor can get back to serving clients while also achieving a more fulfilling work-life balance.  For many RIAs, this means seeking out an M&A partner with more resources, deeper infrastructure and greater scale to lighten the operational and administrative load. 

Tuck-ins can be more comfortable than change-of-control transactions

Yet some advisors don’t want to give up control of the business they have poured blood, sweat and tears into to build, or they don’t believe their clients being well served by the would-be buyers.

Tucking in may make more sense in these circumstances, allowing advisors to leverage the dedicated resources and infrastructure of a larger RIA, including technology, back-office staff and compliance capabilities. 

Sure, small RIA leaders would get these things in an M&A deal, but the crucial difference is that with a tuck-in, they maintain ownership of their business and remain in the pilot’s seat in controlling its strategic direction.

Tuck In – For a seat at the custodial table

Meanwhile, as the RIA segment continues to balloon in overall size as well as number of firms, custodians are evolving their service models to keep up with the economics of serving the growing market.

Custodians now find themselves managing thousands of RIA relationships. The reality of this one-to-many dynamic is that not every RIA will receive the same level of service and attention, because doing so simply costs too much for the fees they receive from lower-asset RIAs. 

From the custodians’ perspective, it makes more economic sense to focus on their relationships with larger RIAs, which they can service more efficiently and profitably. This creates an environment where small RIAs are a blip on custodians’ radar, if that. 

Tucking in enables small RIAs to access the level of service and attention that their larger counterparts get by virtue of their size. It’s the same sort of power in numbers that they would attain as part of an M&A transaction, without foregoing equity and control over the business.

No big check, for now

Tucking in with a larger RIA means putting off a potentially lucrative immediate exit. If owners of small RIAs believe they have taken the business as far as they can on their own or believe the valuations they are seeing today won’t be here tomorrow, they should move forth with the M&A route. 

But if the small RIA owner has confidence that the business still has room to run, and wants to participate in – and maintain substantial stake in – that future growth, a tuck-in offers a way to thread the needle between keeping the status quo and selling out prematurely. 

Moreover, a tuck-in offers the opportunity to build the book of business further while enabling it to run more efficiently, both of which would further raise valuations for a future exit.

Small RIAs have worked hard to get their businesses to where they are today, and many have done it without much outside help. 

They owe it to themselves, their businesses and their clients to resist the lure of big acquisition checks and consider all the strategic alternatives that would make it easier to run their businesses and help them grow. 

Mark Contey is Chief Business Development Officer for LaSalle St., a family of firms encompassing an independent broker/dealer, an SEC-registered investment advisor, and a provider of annuity and insurance products

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