Anatomy of an RIA Acquistion

Speakers
Derek Bruton, EVP, National Sales Manager, IAS, LPL Financial Corporation Jeff Rosenthal, SVP & CMO, Triad Advisors, Inc. Moderator: Philip Palaveev, President, Fusion Advisor Network

Why RIAs?
Fastest growing part of the financial services industry
~ 15 000 firms, ~9 000 SEC registered firms 15,000 firms 9,000 Over $2 billion in AUM

Has absorbed many of the best BD firms

25% - 30% of our current firms have their own RIA Over 50% of RIAs once had a broker-dealer but left it

Potential to expand our traditional value proposition

Provide scale and centralized resources Hub of value added services

Our advisors have a keen interest in growing through acquisitions

Our largest firms aggressively seek to grow Our largest firms will consider switching channels or BDs if they could help them acquire
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Does it matter that they are RIAs?

Does not matter Similar profile of the advisors\principals Common background they were once with BDs ere ith Common culture in many aspects Similar business practices It makes a big difference RIAs are culturally allergic to BDs Steep resistance from the custodians c stodians Introduces the RIA to FINRA rules adding complexity and risk Tangle of economics may frustrate them platform fees, haircuts, different contracts, etc.
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Why Not RIAs?

They position, present and think of themselves as the opposite of the BD culture
Fiduciary relationship Anti-commission Suspicious of haircuts and platform fees

In merger conversations they often end up recruiting BD firms away rather than joining them RIAs have attracted a lot of interest and perhaps too much
Over-valued Unreasonable expectations Compete with BDs and are very protective of their firms Provide many of the same services that are our value proposition Protect their economics and make it difficult for BDs to price their services
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Custodians

Two Distinct Markets

Large Institutional Firms Over $500 million in AUM
Multiple owners and depth of talent p p Employee advisors non-owner, salary compensated, significant role in client relationships Standardized delivery, sophistication, well developed back office Powerful local brand In high demand, premium pricing and multiple buyers vying for the deal One owner of two to three silo practices Small team dependent on the owners Emphasis on personal relationship with clients Needs operation support Economics do not afford a standard deal, deals happen between advisors Has elements of both and can change depending on how aggressive buyers get
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Small Practices Under $100 million in AUM

The gray area - $100 to $500 million in AUM

Who Is Buying?
Before and after aggressive buyers p gg y pre-crisis and fewer buyers today
Consolidators struggle with profitability and payments due. Have stopped acquiring and have even unwound many deals. Uncertain pp q g y participation in the market in the future Banks used to be the largest buyer. Balance sheet issues do not allow for acquisitions. May resume activity when healthy CPA firms all of the large firms have established their main subsidiaries but they continue tuck-in mergers Other advisory firms continue to be very active in the merger market. There are many ongoing merger negotiations at every size level

Broker-Dealer as Acquirers
Sanders Morris acquired Edelman Financial
Edelman became the main retail advisory platform

First Allied and Advanced Equities

Advanced equities serves as an investment platform for reps of First Allied

Hightower Advisors
Not an acquisition model but has some similarities to a merger model

NFP and NFP Securities

Parent company owns several of the largest RIAs

Northwestern Mutual and Frank Russell

Potential for distribution through rep network

Advisors as Acquirers
Advisors are looking to grow
Intrigued by the ability to buy AUM on an earn-out g y y y Unwilling to commit a down payment Struggle with negotiations

Selective acquisitions have generated great results

High retention of clients and assets Relatively smooth transition of service

Good knowledge o t e buye is key o edge of the buyer s ey

Problems arise when the acquired book of business proves to be different than expectations

Circumstances when it works

Retiring advisors CPA practices selling off their advisory business
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Larger Firms as Acquirers

The largest BD firms have aggressive growth goals and are looking to merge smaller RIAs
Looking to create internal management capabilities Merging RIAs as partners in the existing firm Often have an RIA of their own

Sometimes this becomes a trigger-point for the BD firm to abandon their affiliation

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Who is Selling?
1. Large firms who see a merger as a way to grow f faster and obtain new capabilities Large firms who are looking to deal with owner succession and new owner introductions Small firms who are facing succession Small firms who are getting out of the business Small firms who are getting scared Example - $500,000 in fees Take-home per owner is around $300,000 Valuation is around $1 million 5 payments of $ $200,000 +interest Why ll? Wh sell? Only if advisor does not want to work any-more

2.

3. 4. 5.

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Valuations and Terms

Ultimately valuations focus on cash flow of the acquired firm present value of the transferable cash flow stream Transactions have been b t T ti h b between 5 7 X EBOC ( (earnings b f i before owner compensation) The 2 X Revenue rule of thumb has been popular (range of values from 1.8 to 2.2 has been used by FPTransitions) Terms are key
Down payment versus contingent payments Types of consideration stock, loans, etc. Tax treatment of the payments

Advisors need help with the transactions several firms specialize in this market Valuations seem to have held but payments are heavily skewed to contingent forms of consideration
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How Can You Help Advisors?

Education and information Asking the tough questions A ki th t h ti
Why? Does this support your strategy? Is this a good fit?

Providing professional advice and transaction support

Internal experts Agreements with external consultants Many broker-dealer do it on a situational basis Risky and unclear how the return will be realized for the BD

Financing?

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What The Future May Hold?

Significant consolidation in the RIA market
Owners are uneasy about the future the crisis scared many Desire to belong to a larger and more stable entity

Consolidation models will be less aggressive and will change their models
Will emphasize the synergy rather than the financial wizardry

Advisors will lead the market as acquirers and merger partners We will see some of the larger RIAs compete as feeonly broker-dealers
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CaseStudy#1 Textbooktransaction
Seller JohnW. Age56 Age 56 $357,000revenue $57mmAUM FirsttimeSeller Buyer AndrewD. Age48 Age 48 $1.2mmrevenue $111mmAUM FirsttimeBuyer

29inquiriesandthreeoffersin30days 29 i ii d h ff i 30 d EngagedB/Dandcounselearlyandoften Bestfitvs.bestoffer g Clientretentionnearing96%

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CaseStudy#2 TextbookOpportunity,PoorExecution
Seller ThomasD. Age66 $90mmAUM $90 AUM Passiveinvestment philosophy Intimidatedbygrowth yg Buyer SteveF. Age55 $125mmAUM $125 AUM Passiveinvestment philosophy Motivatedbygrowth yg

Lookedgoodonpaper Pastexperienceswerealigned;futureplansnever laidout Sellerslackoffocusonclientskilledthedeal Clientretention=lessthan10% Client retention = less than 10%
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CaseStudy#3 IncorrectExpectations
Seller WaltY. Age81 $200mmAUM $200 AUM UsesTAMPs,fixed income Perpetualseller p Buyer DanH. Age48 $375mmAUM $375 AUM Mutualfunds, separateaccounts Opportunist pp

Buyerwillingtobeflexible,butnotunrealistic Productmixdifferenceswereanobstacle Successionplanningwasfocusedonprice,not business 3tripstothealtarbutnomarriage 3 trips to the altar but no marriage
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CaseStudy#4 OppositesAttract
Seller VincentC. Age58 $450mmAUM $450 AUM Skilledportfoliomanager Feepluscommissions Ridingintosunset g Buyer JaniceW. Age47 $720mmAUM $720 AUM Skilledsalesperson Feeonly Careerpeaking p g

Goodmarriageofstrengths Sellercoaches,retainsthenretires Flexiblebusinessmodelisattractive >95%retentionplus15%increaseinnew business

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CaseStudy#5 DatingbeforeMarriage
Seller CathyJ. Age45 $275,000revenue $275 000 $51mmAUM Wantstogrow,but capitalisscarce p Buyer JosephD. Age55 $1.1mmrevenue $1 1 $90mmAUM Lookingfora successor

Solepractitionerfindscontinuitypartner 50%stakesoldover4years Synergiesachievedleadtolarger,moreprofitable practice Successionplaninplace Succession plan in place

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Trends
2008 2009 True RIAs moving back to commissions Self Preservation 2008 2009 True RIAs moving back to BDs tired of regulatory demands 2010 and Beyond Regulatory Landscape Who Knows?

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RIA to RIA activity

Small to Mid size acquisitions Individual and Partner controlled RIAs $15 M - $100 M AUM Hybrid Model Retirement and Business Enhancement

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Tools Provided
Internal Matchmaker Education g Due Diligence assistance Valuation Guidance it is not always about The Number Risk Mitigation g Funding?
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What an Advisor Needs to Consider

As a Buyer
Type of Practice Culture Client Base Geographical Limits What can I afford Should the present owner remain involved for how long Do I want to keep the staff Technical expertise coming with purchased firm Is my pricing consistent with the yp g other firms

As a Seller
Why am I selling What does my ideal buyer look like Time Frame for exit Have I placed a realistic value on my practice What are my deal killers Do I need cash or can I accept financing for the deal What are my alternatives (Partial Sale, Internal Sale) S l I t lS l )
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Compliance Concerns
1. 2. 3. 4. Record Retention Periods Standard of Care Privacy Licensing

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Compliance Considerations
Record Retention Periods differ between BDs and RIAs
BDs are required to keep the following records for the stated periods: Six year: records of original entry (blotters), customer account records, financial records, and cash records; Three years: order tickets, guarantees and power of attorney, communications, net capital computations and related records, written agreements, advertising records, bills, and training, supervision and continuing education files; and Permanent: corporate records and fingerprint cards. RIAs RIA are required t k i d to keep th f ll i records f th stated period: Fi years: records of original the following d for the t t d i d Five d f i i l entry (journals), customer account records, financial records, communications, net capital computations and related records, bills, written agreements, advertising, and powers of attorney; and Three years: corporate records. Both BDs and RIAs are held to the same standard with respect to most privacy issues. Noteworthy, is the fact that RIA contracts generally cannot be assigned to another IAR. However, transfer of securities accounts, especially those of RRs of Independent BDs, have become very complicated and burdensome due to Regulation S-P.

Privacy Regulation S-P

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Succession Planning
Starting Point get emergency plan in place to enhance value of business at its sale Acquisition planning

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Sample Checklists and Other Tools

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