Brooke’s Note: Whether roll-ups survive and what forms they take matters very much to advisors, private-equity investors, roll-up owners and the RIA business as a whole. So there needs to be serious intellectual discussion with no artificial barriers — like, for instance, what you call a roll-up — for this discourse to flow. Us journalists have said as much before. See: Why the term 'roll-up’ should stay in the RIA vocabulary. But a better, more nuanced and authoritative take on that point of view is provided here by Matt Cooper — after he was the subject of some we-are-not-a-roll-up dogma. Thank you, Matt, for hitting back.
With the recent flurry of news regarding M&A transactions in the RIA marketplace, we are seeing a whole new discussion around what it means to be a roll-up.
So lets get it straight.
Technically, any form of RIA aggregation effort could be tagged a roll-up. If it walks like a duck and flies like a duck … would you call it a horse? I suppose that depends on whom you ask. Having been involved in M&A situations referred to as roll-ups and also having been criticized for using the term roll-up to describe others in the marketplace, I may have a unique perspective.
I was aggressively criticized by the chief executive of a what I called a roll-up for describing his firm in an e-mail as a private-equity-backed consolidator/roll up. Again, if it walks and flies like a duck … Considering we are executing on an aggregation strategy ourselves (albeit very differently), I find this squabbling over positioning to be somewhat preposterous.
There are many firms in the marketplace looking to help RIAs and themselves by bringing together advisors and advisory firms under one roof. At Beacon Pointe, we have our own aggregation model, called Beacon Pointe Wealth Advisors. We are aggregating advisors and have been referred to as a … wait for it … “roll-up.” Apparently that term is viewed differently by different folks. While some regard the term as negative, there are many who do not, and on balance roll-ups play an important role in the ever-expanding world of advisor aggregation. See: Beacon Pointe launches advisor-aggregating effort with first deal in Arizona.
Once we can all get past the use of the term itself, I believe it is time for someone to explain how the roll-up world might be better dissected, ordered or categorized. I also want to say all of us in this industry are best served if these very public aggregators succeed. It hurts everyone should they fail. That being said, sure as the sun will come up tomorrow, some will indeed struggle.
My perspective and that of many in our industry is that the RIA/advisor space is extremely fragmented, and will benefit greatly from consolidation and aggregation. To quote Neil Simon, my friend and fellow aRIA (Alliance for RIAs) study group member, does the industry really need 30,000 research departments or operations departments? No, the industry and the thousands of advisors within the industry will benefit greatly from mergers/acquisitions and joining forces to create scale. See: Mariner Wealth Advisors buys a $1.3 billion wealth manager that first unwound its ties to a bank.
So, roll-ups serve a purpose — they are part of the solution for many advisors looking for solutions around succession, growth and managing their equity. But there are two distinct types of roll-up firms or aggregators. The first is the type that has taken large private-equity money. We’ll call this the Private-Equity-Backed-Consolidator (PECB). The others are the firms that have taken no third-party money. We will call these simply, RIA Aggregators. Both are roll-ups, to be sure. However, the motivations and pressures for each can be quite different. It’s important for the advisor thinking of joining either to understand the difference.
The third party
First, let’s discuss the PECB. These are typically financial models first, formed by people who have had great success in the financial services business and who are probably in the second phase of their career. These folks may have never been client-facing advisors. These firms typically buy advisory firms for a combination of cash and stock in the roll-up. This serves a definite purpose for the advisors looking for cash today. They have cash in their pocket for a nice portion of their business. The valuation paid is based on today’s value and the future upside is with the performance of the roll-up stock when there is a liquidity event. This is where the uncertainty may or may not lie. See: What the Cetera-Genworth IBD deal says about where these companies are headed.
Each of these firms typically developed a model for aggregating advisor firms and advisors, then went to pools of capital, typically private-equity firms, and asked for both equity and debt capital to fund their model. Why would a third party such as a private-equity firm invest? Certainly for a return on its investment. They are not doing this for free, and they are accountable to their own investors and must deliver a return. Therefore, the PECB is almost certainly under pressure to get to scale and have a liquidity event to provide a return to the third-party investors, and of course themselves and the advisors who have bought in, for their hard work in building the firm. See: Former Morgan Stanley and UBS wealth management chief flirts with roll-up model then pivots to management consulting.
But what if the PEBC stalls and does not make it to a sufficient scale to attract a buyer or sell in the public markets via an initiial public offering? What if the PEBC begins to backslide and contract? What happens if they do get public or sell to an even larger private-equity firm? What happens to the underlying advisors in any of these scenarios? What is the future culture of the overall company? How is the advisor treated, and how are services delivered? These are just some of the risks of the PEBC model. Again, it is not good for anyone if these firms do not have success. We all are better served if they succeed. See: Private equity firm acquires First Allied.
The second approach to being a roll-up is the organically grown RIA Aggregator. Typically, these are large RIAs that have built their businesses organically over a number of years and recognize they can help other advisors by aggregating them under one umbrella and collectively scaling off of centralized services and a larger brand. While these firms may offer some cash upfront, typically these models are more about advisors joining now with a cash buyout down the road when the advisor is ready to retire. The approach is to provide certainty to succession planning and help the advisors grow along the way. See: With as much finesse as cash, Marty Bicknell wins a $1.3 billion RIA in an auction-style contest.
If you believe that larger firms can demand larger valuation multiples, then this may be a place to merge your equity without cash today and wait for the larger valuation at succession. This model is not without completion risk. Larger, better-managed firms should have a better capacity to retire merged partners in the future. The advantage to these models may be that they are not under pressure from third-party private-equity investors. RIA Aggregators can be deliberate in selecting their partners and the joining partners have certainty as to whom they will be working with longer-term. In the event there is a sale of the overall company, the joining advisor partners should have a “tag along” right to sell and not be stuck with new management and culture. See: This generation of advisor aggregators puts the roll-up ghosts to bed, for now.
Both the Private-Equity-Backed Consolidators and the RIA Aggregators play key roles in the market. Which model is best? That depends on who you are, what your long-term business goals are and, ultimately, what you want your legacy to be.
Matt Cooper co-founded Beacon Pointe Advisors LLC and is responsible for overseeing its Private Client Services Group. In addition, Matt oversees Beacon Pointe Wealth Advisors LLC, a subsidiary of Beacon Pointe. Matt graduated from the University of Southern California School of Business Administration with a B.S. degree in finance and business economics. He lives in Newport Beach with his wife and three boys.