It’s possible for small, solo registered investment advisors to keep their models consistent and have good businesses, but in the current market of multiple services and increased competition, they may also face stagnant growth and client attrition, according to a group of panelists discussing strategic partnerships at RIA Edge Los Angeles.
The panelists, which included two M&A bankers and one M&A acquirer, all agreed that it was possible, with advancements in technology and platforms, for small advisors to run a good “lifestyle” practice without merging or partnering with a larger entity. However, they also each had a warning for advisors looking to stake at least a long-run career in that once classic view of being a solo practitioner.
“I do think that you can create a nice business and have a nice lifestyle and outsource for scale—I don’t think there’s anything necessarily wrong with the approach,” said Brandon Kawal, partner, Advisor Growth Strategies. “It’s going to be harder, though, than it used to be to compete, because clients are going to start demanding things, demanding time and resources, and having expectations that will change on you.”
Kawal said that, at some point, an advisor will want to sell their business to monetize their work. If they are not working on building a holistic firm, that may result in a worse outcome in the end.
“I don’t think you have to be with the $50 billion, $100 billion, $200 billion firm,” he said. “I do think you have to plan, though, because your clients are going to start asking you what your plans are, they’re going to start demanding things and having expectations of you. … You need to be a little bit more proactive than just saying I can outsource and kind of set it.”
Derek Bruton, senior managing director at investment bank Gladstone Group, used the example of a prospective client he spoke with who had a good setup for a lifestyle practice.
“I asked him what his top line revenue was, and he said, ‘about a million and a half,’” Bruton said. “I said, ‘What’s your EBITDA?’, and he goes, ‘about a million and a half.’”
Bruton said it was clear that the advisor was not focused on growing his business, which “was fine, because that’s the freedom that you can have.” But he also added that with the increased competition in the market, including from larger firms with resources and capabilities, that attitude may pose a risk to continuing the practice.
“I posed to this prospective client that he may not care about growing, but I think he could have retention issues in the future,” he said. “I think as his clients drive down the highway and see a billboard for some large, $30 billion RIA out there and begin to wonder, ‘what are they bringing to the table? Do they have estate planning? Do they have tax planning, and do they have insurance planning capabilities? Because my little advisor with $100 million in assets doesn’t have any of that stuff.”
Eamon Verdone, M&A director for RIA Savant Wealth Management, said a financial advisor can run a great lifestyle practice with the technology available today. He added, however, that when circumstances with clients change, or in the markets, their model could be at risk.
“Whether it’s resources and clients expecting more, it’s not necessarily fee decompression, but service expansion, which then hits the markets, what happens to your lifestyle practice?” he said.
Verdone cited studies showing that new client flows predominantly go to larger firms investing in marketing and organic growth engines.
“When that pipeline of clients dries up and maybe existing clients are winding down their assets, the lifestyle changes a little bit,” Verdone said. “So [a lifestyle practice] is something that is absolutely doable, but we need to be mindful of what your end goal really is and if that’s the route you want to go.”
The panelists also agreed that, with all the buyers in the market today, solo practitioners can likely find an acquirer that fits their needs and goals.
“I think we’ve seen this industry start to mature in the last five to seven years,” Kawal said. “There’s capital chasing this space now … I think a lot of you probably see in your day-to-day lives that this is the model that clients are choosing to go to. Our independent advice is winning in wealth management, so it’s attracting a lot of attention.”
Bruton stressed that if an advisor considers a strategic partnership and takes the time to prepare for the move properly, there are enough buyers and models out there that they should find a good match at the right valuation.
“There’s so much opportunity out there,” he said. “It’s not a matter of whether a firm will find the right buyer, but when.”
