The Tuck-In Option For Advisors And Firms

Janeesa Hollingshead, Contributing Editor, Wealth Solutions Report

Head Of Dynasty’s Investment Bank Examines Advisor Tuck-Ins From The Perspectives Of Both Advisors And Acquiring Firms

Recently, we explored the rising trend of tuck-in transactions with a focus on tuck-ins of RIAs that relinquish their registrations to affiliate with larger corporate RIAs. While this is a large segment of tuck-in transactions, tuck-ins of advisors into existing firms can occur in a broad range of structures and sizes.

Advisors enter tuck-ins from various employment or independence scenarios and choose different deal structures for compensation and future work at the acquiring firm. Some teams choose to tuck into a small firm that is highly coordinated with a large enterprise. While sizeable transactions make headlines, many small tuck-ins fly under the radar.

Harris Baltch, Managing Director, Head of Investment Banking, Dynasty Financial Partners

To explore what advisors and acquiring firms of all types and sizes should consider when examining the tuck-in option, we spoke with Harris Baltch, Managing Director, Head of Investment Banking at Dynasty Financial Partners. Baltch described who can benefit from tuck-ins and pitfalls for both buyers and advisors.

WSR: Which advisors and firms benefit the most from tuck-in arrangements, and what factors into that?

Baltch: Alignment is key when structuring a tuck-in deal. For the advisor, it’s all about culture and the service model. Assuming there is alignment, the compensation needs of the advisor – upfront capital, equity and payout – are the three primary levers of value offered by a buyer.

Buyers should understand how accretive (or dilutive) the marginal addition of the tucked-in advisor will be.

Buyers should understand how accretive (or dilutive) the marginal addition of the tucked-in advisor will be, including factoring in the cost of capital to the extent they need to raise capital of their own to do the deal. Additionally, buyers should create a repeatable process so they can use a similar deal structure every time. Trying to structure each new deal from scratch is not scalable and can be inefficient.

WSR: What are the attributes and red flags that an advisor should look for when searching for an acquiring firm for a tuck-in?

Baltch: When interviewing firms to join, an advisor should watch for red flags. First, the advisor should study the buying firm and their values, rather than just chasing the top valuation, which may come with conditions that are difficult to achieve. The advisor should also understand the buyer’s M&A cadence. Has the buyer done M&A before or are you their guinea pig?

Advisors should look at the compensation in the deal structure. The buyer must show it has the capital to do the tuck-in and if it does, the advisor needs to know the source of the capital. If equity is part of the compensation package, how is that equity valued, and how will it be monetized if the advisor retires before the firm sells?

WSR: What should an acquiring firm look for in an advisor, and what should it avoid?

Baltch: Before a firm commences tuck-in discussions with an advisor, they need to check for some common pitfalls, such as material disclosures, whether the advisor is walking away from their business in under a year, and how quickly the client list will turn over due to a book of business based on aging clients. A buyer’s proposal should adequately address the needed replenishment rate to gather assets of new clients.

If the book isn’t growing, or hiding in the shadows of market appreciation without showing true organic growth, it is likely in runoff.

If the book isn’t growing, or hiding in the shadows of market appreciation without showing true organic growth, it is likely in runoff. If the advisor’s track record doesn’t show organic growth, they may not have the ability to close new business.

Janeesa Hollingshead, Contributing Editor at Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com.

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