In 2014, there were 47 acquisitions of registered investment advisers involving firms with a combined $47.4 billion of assets under management, according to Charles Schwab & Co. That may sound like a like, but it constitutes only one quarter of 1% of the industry's participants.
In a new research note, Mark Hurley, CEO of the Fiduciary Network, explains why, despite the well-documented aging of RIA owners, more deals aren't getting done.
(More: M&A flat as buyers grow disillusioned)
| Key Takeaways: |
| • Few firms that come to market actually complete deals: In 2014, less than 0.25% of industry participants completed transactions. |
| • Psychology is the biggest hurdle: During the transaction process, selling owners are scared, uncomfortable and even obsessive. |
| • Acquirers are often simultaneously afraid not doing a deal as well as actually completing one. |
| • Getting the capital necessary for material acquisitions requires an acquirer to cross over the mental hurdle of having an outsider as a partner in the firm. |
| • Acquirers compensate for fear by overpaying for greater certainty and underpaying for risk. |
| • Only owners who are ready and capable of working another decade have real bargaining power over their successors in a transaction. |
Mr. Hurley and his firm found that the psychology of the seller and the acquirer disrupts negotiations and is the primary reason why deals fall through.
“Psychology is far more important than economics,” Mr. Hurley said in an interview. “On both sides of the equation there are enormous psychological hurdles.”
Some deals failed because the owners didn't have a business to sell, according to Mr. Hurley. Rather, they simply had “a book of business'' that was strongly connected to the adviser. In other cases, internal problems at the selling firm made the transaction unappealing to the prospective buyer.
But on other occasions, the study found that owner demographics was a major hindrance in M&A talks.
(More: Advisory firm buyers can grease the M&A wheel with these 9 pointers)
Firms are put up for sale only at a point when the owners are close to retirement and they realize that it's the only economically rational option. This timing often stems from a fear of loss of purpose. As the study mentioned, “sellers are afraid of trading their life's work for a fraction of its fair value.”
CLIENT RELATIONSHIPS
They are also worried about damaging the client relationships their businesses are built on. Owners are afraid of how clients might react to an acquisition and often look at selling the firm as going back on their commitment of being independent.
This is the gap between buyers and sellers — where acquirers look at the deal purely as a business transaction and sellers feel like they are giving away their life's work, which often leads them to be uncomfortable and obsesses over small details.
"The seller hates us for being there," Mr. Hurley said. "There are many, many, many deals that have gone through the whole process, and at the end the sellers can't do it."
For the acquirers, there are various factors to think about like long-term planning. Since for some firms, it may be their first material acquisition, they have little idea of the terms and procedures and “what they should pay under what terms.”
For these reasons and more, negotiations often fail to be consummated into a transaction. Certain measures that help ease the process include putting in place a detailed agreement which is transparent and thorough, preparing the firm and its staff for a sale much before it “needs” to be on the market and institutionalizing client relationships.
Mason Braswell contributed to this article.
