Brooke’s Note: There has been a spirited conversation, both online and off, in the wake of this article run last week: We’re better than this: The 10 words and expressions that should be expunged from the RIA business. PR expert Joe Anthony rightfully raised the question of whether “roll-up” should be added to the banned list based on my own assertions. In this article — with the intellectual heavy lifting done by Mark Tibergien — I argue why the term deserves to stay in the RIA lexicon.
Often when I’m speaking to a reader or source on the phone, he or she refers offhandedly to RIABiz as a blog. Though no rash appears on my skin, I do experience a palpable allergic reaction.
My typical reactionary spiel is to say that I associate blogs with a form of writing that consists largely of the views of a single person and that there is a very loose adherence to the principles and rules of journalism. I remind the person that we solicit multiple views from experts on the different sides of an issue and that the article is overseen and worked on by professional editors.
Where I get wrong-footed is when the miscreant asks me what general term of classification should be applied to RIABiz if it’s not a blog. I have been heard to say, “online publication or online trade newspaper.” Yes, I know; not too good.
Feeling your pain
So to the founders, executives and investors in roll-ups — and the PR people charged with promoting roll-ups — who hate it when roll-ups are called roll-ups, I feel some of your pain. See: What exactly the CEOs of HighTower, Focus Financial and Dynasty Financial revealed when they shared a stage in Las Vegas.
But the term is not going to go away entirely — nor should it.
Roll-ups can look as different Great Danes and lhasa apsos, but we can all agree that these two breeds are both very much dogs — based not only on their DNA but also on their essential canine predilections. (My 120-pound black lab greets a dachshund with the same ritualistic approach as he would a rottweiler or husky) Roll-up is not a term — like '“end-to-end solution’”— that confuses as much as it clarifies. Dogs greeting each other use an end-to-end method.
“Roll-up” conveys more information more efficiently than ugly-on-the-page words such as aggregator, consolidator or national-wealth-manager-that-happens-to-grow-by-acquisition-every-time you-turn-around.
Here is a series of thoughts, mostly verbatim, contributed by Mark Tibergien, chief executive of Pershing Advisor Solutions LLC, that may help people in the advisory business to better come to grips with the DNA and essence of roll-ups:
(I consider Mark a foremost authority. Not only does he have the perspicacity in the RIA business to opine but he also did research on the topic for a report he wrote when at Moss Adams.)
1.) Whether the goal is to have a liquidity event such as an IPO or to aggregate earnings doesn’t matter, any organization that acquires an equity interest in an advisor’s practice whether for cash or stock would be considered a roll-up or consolidator, if it is doing so on a systematic basis.
2.) If you look at other industries — accounting firms, medical practices, funeral homes or muffler shops — as a model, you will find that roll-ups typically target fragmented industries comprising many small yet mature firms that have no apparent continuity plan. The goal is to achieve economies of scale in buying products or services, branding and marketing, technology and operating support as well as having professional management.
3.) There are indeed companies associated with this roll-up milieu that are not usefully called roll-ups. Affiliated Managers Group Inc., Fiduciary Network LLC and other firms that primarily provide funding in exchange for equity should be excluded. The holding is temporary (long- term but not permanent) and is a vehicle for allowing your partners to buy in later. See: AMG makes a dramatic entry into wealth management arena, buying majority stake in $10B Veritable.
4.) This line of thought, in my opinion, would also partially exclude a firm such as HighTower Advisors LLC, which is primarily a recruiting organization using the branch and home-office structure of a broker-dealer but the platform of a registered investment adviser to recruit employees away from wirehouses and banks. Since HighTower has not focused on buying books of business per se but on recruiting, I’d put it in the same category as Raymond James Financial Inc. or Benjamin F. Edwards but with a strong advisory-firm flavor (although it also has a B-D). But if HighTower starts buying up independent businesses, it would fall into the roll-up category. See: HighTower adds an existing RIA and two big UBS producers to a burgeoning Silicon Valley office.
5.) Consolidators always have an endgame, so they are not roll-ups forever. Some cash out with an IPO, others evolve into larger enterprises with a common brand, as Waste Management did with trash haulers and dumps, or Service Corporation International did for death-related services. Some companies are now just viewed as big public operating entities servicing a big market. This would appear to be the argument that United Capital Financial Advisers LLC is making. A big part of its proposition is focused on leveraging its back office to support advisors who want to grow but don’t want to manage the functionary part of their business — perhaps that’s why it is targeting independent-broker-dealer reps.
6.) There are other consolidators, such as Aspiriant — which has rolled in comparable-size firms — that could be considered roll-ups. But it’s harder to put them in this category because they are not making a passive investment but taking an active interest in building capacity and brand for their business. The goal is not to defragment the communities they are in, but to build market presence in those communities.
7.) Serial acquirers eschew labels such as roll-up because they convey a focus on economics and not on business models. But frankly, when you look at what’s happening in this industry, it might be a better idea to present yourself as a buyer of first resort instead of a buyer of last resort, so that you get the cream.
Brooke’s Final Note: So what do I finally do when people call RIABiz a blog? I get over it.