Advisory firm M&A must be about more than money, experts say

Investment advisory firms must think beyond the financial aspects of an acquisition if they want to get the most out of a deal, especially under current economic conditions, experts said this week.

The idea of aggregation as the motivation for a merger irritates Brandon Kawal, principal at Advisor Growth Strategies.

“I want to kill the word ‘aggregator,’” Kawal said during a webinar Wednesday in New York hosted by JConnelly, a communications consulting firm. “In a world of aggregation … you would just care about the financial equation. We get AUM [assets under management]. We get revenue. We get EBITDA [earnings before interest, taxes, depreciation and amortization]. We’re really just not operating in that environment right now — a down year in 2022, tricky circumstances in the economic environment, even as we sit here today.

“None of it’s about aggregation," Kawal added. "It’s about integration. That’s a mission statement for ’23.”

Advisory firms should put a priority on what they would gain from a union with another firm, such as adding expertise in retirement savings, environmental, social and governance investing, or some other area, the panel participants said.

“The economics will not make sense unless there’s some added benefit that comes to the acquiring firm,” said Raj Bhattacharyya, CEO of Robertson Stephens.

If a firm is thinking about making an acquisition, it has to begin with the end in mind in order to ensure a good transaction.

“If you’re able to nail down explicitly why you’re doing a deal and where you want to take the business, you can structure a deal that helps you get there,” said Marc Cabezas, executive director for mergers and acquisitions at Hightower.

Assessing whether a target firm is a good cultural fit must be done well before the asset purchase agreement is signed, Bhattacharyya said.

“Figuring that out very, very early in the process … is very important,” he said. “Talk about what life will look like for your employees, your junior staff, your clients — what changes, what stays the same and not having misaligned expectations. Go into this in a level of detail you might not have thought necessary.”

The panelists said M&A for registered investment advisors will continue its upward trend, even though the appetite might not be as ravenous as in previous years. Buyers are taking more time to kick the tires on potential deals and being more discerning about capital deployment, Kawal said.

“You will find a partner,” he said. “You just may not find 15 willing to go top bid for you.”

Prior to signing letters of intent, “firms are willing to take more time to date,” Cabezas said. “It allows for the right partners to self-select.”

The M&A environment is inviting, the panelists said.

“Valuations are at attractive levels,” Bhattacharyya said.

Kawal also expressed optimism.

“I still think there’s a lot of interest from capital providers in this space, which is usually a good sign for M&A to come,” he said. “M&A is really embedded in this industry’s DNA now.”