Mergers and acquisitions in the RIA space are occurring at a record pace that has proved to be a driving force in the evolution of financial services as we know it. Most recently, I was at a conference in Chicago and had the opportunity to be walked through an extremely insightful report by TD Bank about just this topic. The M&A trends in the RIA space, as presented in the TD Bank report, are particularly illuminating. For instance, in 2018 alone RIA merger and acquisition transactions skyrocketed by 24%. Further, the RIA multi-dealer sector showed even more significant growth, making up 45% of all transactions completed. Of the RIA M&A deals made, 38% were driven by just six firms – Mercer Advisors, Buckingham Strategic Wealth, CAPTRUST, EP Wealth Advisors Inc., Focus Financial Partners LLC, and Wealth Enhancement Group.

The TD Bank report further explored RIA M&A by going past the statistics themselves and citing the roadblocks faced by firms making these deals. Specifically referenced as challenges for RIA M&A in the TD Bank report were valuation methodology, negotiations, and the seller’s ability to let go. While these roadblocks do exist, by focusing on due diligence, strategic insight, and the art of making a deal in and of itself, RIA firms interested in M&A ensure success not just in completing the M&A transaction but in the long-term sustainability of business operations and strategic growth practices.

Take, for instance, valuation methodology. When two firms enter into negotiations for a M&A deal very often the perception of the acquiring firm and selling firm are very different as to what the selling firm is actually worth. The acquiring firm tends to be focused on the fiscal side of valuation, which includes assets under management, general business assets, and the value of other resources at the firm such as technology. The selling firm, while recognizing those same fiscal impacts, will also tie more emotional and intangible factors to valuation, such as brand and market presence and the ‘sweat equity’ they put into growing and maintaining their business. Successfully bridging the gap in valuation methodology can best be addressed by proper due diligence where fair and accurate accounting for all factors impacting a company’s value are assembled and discussed by both the acquiring and selling firms to arrive at a mutually agreeable valuation and, ultimately, a fair purchase price.

When it comes to the negotiation and closing of the M&A transaction, strategic insight comes into play in so much as both firms need to have a modicum of mutual respect and most assuredly a symbiotic philosophical approach to their business in order to be successful. When it comes to M&A in the RIA space, it cannot be just about the numbers. You are merging staff, business resources, and – most important to consider – clients when completing these deals. Staff members need to be assured of a degree of stability during M&A transitions and business resources needed to be accounted for in order to achieve efficiency and eliminate duplication or ineffectual operations. The clients themselves, which is every firm’s biggest asset, need to be educated about the benefits of the M&A deal, understand how their account will be managed, and what – if any – transition impacts their may be. Bear in mind, clients often have a strong affinity to their particular advisor and firm and this must be strategically accounted for during the M&A deal completion.

Lastly, when addressing the challenges of an M&A deal, the seller’s inability to let go truly comes down to the art of making a deal itself. We have all heard of ‘buyer’s remorse’ but there is also ‘seller’s remorse’. Many RIA advisors came to the space because they wanted to create a business of their own design – one which was financially successful for themselves and their clients while fostering the open and transparent business structure that is lacking in wirehouses and the big bank financial sector. Therefore, it is understandable that a firm owner in the RIA space will be tied emotionally and mentally to the ownership of their firm and identify on a very personal level with its present and future success. Tackling this issue head on in the negotiation process, creating a level of camaraderie and comfort for both seller and buyer, and clearly laying out how the M&A deal will benefit the seller and the success of their firm are all essential in achieving the ‘close’ when it comes to RIA M&A.

No deal worth making is without its challenges. When it comes to RIA M&A, by applying the business values and operations which make RIAs so successful in the first place both the acquiring and selling firms can feel confident that they will walk away from the negotiating table having completed a deal that is not just successful now, but lays the framework for success well into the future.