Are You Predator or Prey?
Challenging times make growth and succession strategies even more important.
Are you ready?
Today’s RIA marketplace is ever-changing and fast moving. You don’t want to be left behind.
We’re seeing an extraordinary amount of M&A activity in the RIA space right now, which may seem strange given the macroeconomic environment and market volatility. Yet it’s paralleling what we saw beginning way back in the 1970’s with the consolidation of the banking industry: larger banks struggling with organic growth saw an opportunity to increase market share and accelerate growth by adopting aggressive acquisition strategies. Smaller banks saw an opportunity to join larger more powerful franchises to remain competitive. In addition, larger banks were paying handsomely — often 3-4X book value — to acquire well positioned regional players. Small bank shareholders faired very well.
At the end of 2021, a firm’s 12 to 24-month growth strategy might have been: “Let’s not upset the apple cart. We’ll keep riding the wave of 12+ years of low interest rates and massive government stimulus packages.” Cheap money drove markets higher creating a false sense of accomplishment at many RIAs.
Then 2022 happened. The post-pandemic economy and supply chain issues spiked inflation, and the U.S. Federal Reserve made eight separate interest rate hikes (so far). Today, the stock market is unpredictable, customers have real options to grow wealth beyond equities, and an RIA’s “Stay the course” strategy for success may need a rethink. Additionally, the recent failure of Silicon Valley Bank has created more market volatility, and more hesitation, making AUM growth even more difficult. Equity markets don’t like the unknown.
Growing your RIA firm even in challenging times
Many RIAs struggle with two critical questions: How do we grow AUM, and what is our succession plan?
AUM is essential. It drives revenue, EBITDA, and in turn, valuation and enterprise value. Yet, organic AUM growth may not be as easy today as it was 12-15 months back. With today’s high interest rates, a firm may not attract as many new clients because people are keeping more cash, putting it in money markets, CDs, and even savings accounts (!). Fixed income investments are now very reasonable options. Where last year a firm may have focused entirely on organic growth, 2023 may mean considering buying, selling or merging with another firm.
When it comes to succession, today’s macroeconomic environment suggests previous plans may need to be reassessed as well. There are many new players in the market, such as private equity firms, who tend to have more capital but also different acquisition objectives. If your RIA wasn’t considering succession plan options until owners approach retirement age, you may be missing an opportunity, because the right succession plan can be key to growth now as well.
Whether growing AUM or determining the future trajectory of your firm, most RIAs see three paths forward:
1. Keep things “as is” and grow organically.
“We’re comfortable, we’re not sellers. We’re happy.” But what if you learned there are buyers out there who are paying 14X EBIDTA? This might warrant a conversation; yes, you may be on the right course, but perhaps not. The stakes are too high not to look carefully at all your options. But as outlined above, we don’t recommend the “what worked before will keep working just fine” strategy without reevaluating based on current market conditions.
2. Buy another firm.
Looking at options in depth may uncover the path we call “filling out your dance card.” Perhaps you want to bring in talent where you don’t yet have expertise, such as real estate or emerging markets. Perhaps you want to grow AUM more rapidly while also cutting costs by the selective consolidation of operations. Maybe your RIA’s brand is growing, and a complementary investment strategy added to your firm’s portfolio is best for your clients who are looking to diversify.
3. Sell or merge with another firm.
It may be time for you to monetize your significant investment — cash out of the assets you’ve built. Perhaps your firm has talent in the trenches but not in management and you don’t know who will succeed you. Selling can be “de-risking,” ensuring there is a strong plan in place to keep growing. Or perhaps you want to give your clients a better platform and more options, so you join with another firm that’s strong in alternative investments. Larger organizations often create new and exciting career growth opportunities for owners and employees alike.
There are many options for the right growth strategy, and each is as unique as each RIA. Our primary recommendation is to be proactive, because at the end of the day, the biggest question is:
Are you predator or prey — and do you know?
There is no one-size-fits-all plan when it comes to successful growth of your RIA, but don’t unconsciously become prey: complacent, waiting for something to happen without planning for action, and unprepared for what might be coming.
If your firm is clear about its growth strategy combining internal growth with selective acquisitions, then you are a predator. You are in a proactive mode, constantly looking for growth opportunities.
If you aren’t a predator, you don’t want to wait too long to determine your best strategy — as rates continue going up, equity markets continue to be volatile, and your firm continues to age — you will still be in the game but playing by others’ rules and on their timetables. When you decide to be a seller or buyer, you want to be sure it’s on your terms.
Today's market unpredictability and sharply rising interest rates makes it even more difficult to see the best path forward. ADP strongly recommends that clients not be deterred by the current market/rate conditions but continue to actively evaluate their options. What was the right strategy for your firm last year, may not be the right strategy today. You need to be nimble and informed, and in a rigorous analytical mindset. You can’t just sit on the beach and watch the clouds pass. These times require a well-articulated business strategy. Do you have one?
ADP has years of success and deep domain experience in the development and implementation of strategic growth and succession options for clients. Let us help you better understand the issues at hand and guide you through a rigorous process to determine what is best for you and your stakeholders. When you are ready to discuss strategic options for your firm, don’t hesitate to reach out to us for more information.
This article was written by Robert P. Morrow III, Senior Advisor to Advice Dynamics Partners, who works with our RIA clients as an executive coach and communications expert. When senior partners at a wealth advisory firm need an effective communication strategy to explain an upcoming merger to employees and clients, Rob is our go-to. Aligning interests among all stakeholders on a strategic transaction is paramount. Rob helps gain alignment through a thoughtful, well-crafted process honed over decades.