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Also available as podcast (Episode #130)
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What Is An RIA Roll-Up Firm?
TL;DR – There is no set definition of what a “roll-up” firm is. Several business models have been introduced to the marketplace that vary based on variables such as the amount of ownership acquired, operational control, economics, etc. There are pros/cons to all models. It is important to understand how they vary, and which approach might be best (and when) for your unique practice.
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Full Transcript:
What is an RIA roll-up firm? That is today’s question on the Transition To RIA question and answer series. It is episode #130.
Hi, I’m Brad Wales with Transition To RIA where I help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
On today’s episode we’re going to talk about what is an RIA “roll-up firm.”
There are two reasons I wanted to make this episode that I think would be helpful for all of you.
First, there’s no set definition of what an RIA roll-up is. It is at times used to refer to different kinds of models. I want to talk about what some of the models are that you’ll hear referred to as roll-up firms. And it’s a good reminder that there are a lot of different flavors of these firms, so don’t make any assumption that if you hear “roll-up firms” that they’re necessarily the same model.
Next, is to acknowledge that most of my audience is in the process of considering transitioning their practice into the RIA model. And at that part of the lifespan of your career, you’re not necessarily looking at RIA roll-up options just let.
But part of your transition due diligence should be to understand what your eventual succession or liquidity options will be down the line. Which for some of you might involve some sort of roll-up option.
And so even though it might not necessarily be in play as you’re first transitioning into the RIA model, it is something I’m asked about at times, so I wanted to go ahead and make this episode.
I’m going to go over a few of the models in the marketplace, and why some advisors/teams choose one model over another.
But again, this is not to say that one of these is the definitive definition of an RIA roll-up. There are different flavors to this.
The first model is where some sort of (investment) entity has recognized that the RIA space has very good economics, the client retention is very good, and the margins are pretty good.
They see it as… “This would be a good thing to invest in. And so we are going to pool money together (ex: from private equity) and we are going to acquire RIAs in full and we will incentivize the advisors to stick around hopefully and stay on board. We are going to acquire them in full, but we are going to keep them separate and let them operate autonomously. We recognize these are good firms. We recognize these have good economics. We want to buy these firms and we’ll hold them under the umbrella organization, and allow them to stay autonomous and operate individually.”
We’ve seen some attempts of that over the years. But what seems to happen is even though they talk about letting each RIA continue operating autonomously, the reality is there is a tendency to slowly try to merge some of the (for example) back office functions of the RIAs they’ve acquired.
They recognize there could be some synergies if the acquired RIAs all use the same payroll process with their employees, or how they process client fee billing, etc. And next thing you know, all the RIAs are doing it the same way.
There seems to be a (understandable) tendency to do this. They say they’re simply buying RIAs, and letting them operate independently. But you can see how there could be a slow creep behind the scenes. Or at least there’s the potential motivation for such a slow creep of integration behind the scenes.
That is the first type of roll-up approach.
The next type of model involves not only buying RIAs in full, but with the intention of then “rolling” them up into a single RIA. And so not only do we recognize the economics of each of these and how good that is, but we do recognize there’s a lot of efficiencies we could bring together here, as I just kind of alluded to in that other model.
And so we are going to bring all these practices under one ADV, one RIA, one name. We’ll eventually move everyone to the same technology. Perhaps we’ll even absorb everyone into the same approach to asset management. And there are some synergies there. There are some benefits to doing that and having that kind of consistency and having processes and having scale in how you do things.
But if you’re the one selling to that firm, you just need to understand that is their game plan. It’s like, we are going to acquire the practice. This typically doesn’t happen overnight, it’s a measured process, but we do intend to fold you into the main RIA. And here’s what that process looks like. Here’s what you can expect going forward.
So that’s another example of a roll up where they’re not trying to shy away from the fact that they’re saying… “we are acquiring your entire firm, and we’re going to roll it up into ours and it might take one, two, three years to fully do that, but that is the game plan here.”
And then moving on from that full acquisition, there have also been other “roll up” models, and this kind of goes back to the first example I gave that said… “we recognize this is a great business and we recognize great economics and we’ve identified great RIAs out there, we would just love to take a minority ownership in lots of great RIAs and let those main principles, those main owners retain a majority position arguably so they are still highly incentivized to continue to grow the firm and we are just going to help them essentially take some chips off the table or maybe by giving them capital they can use that to then grow the firm and through acquisitions.”
We’re going to buy that minority position, maybe 10, 20, 30 percent in a lot of different firms and we’re going to be hands off, just let them do their thing and we get to take advantage of this model with great margins and great client retention and all those sorts of things.
And you see firms doing that and I think we’ll continue to see that because again, those economics can be a big draw,
But again, do you eventually have some of that creep of… “I know we’re only a minority owner, but we got 20 of you RIAs, we’re a minority owner in all of you, and we think we could get you all on the, to use the same example, maybe the same payroll system. That would save all of you a lot of headaches and you’d get better economics.”
There is the incentive to try to creep that along. But there are these models that went into it with the intent to let the RIAs be fully autonomous.
And then the final model that I’ll throw out there, and this is not an exhaustive list of these various roll-up models, is there are players in the space that say… “we intend to take a minority percent ownership, or a majority, but not necessarily 100% ownership of your RIA. We plan to be actively involved with you in running that RIA.”
And you might think, what advisor would possibly agree to that?
Well, part of the value proposition of the players that are in the space that I just described is to say… “we have the expertise, we have the resources, we have scale to help you grow faster than you’re able or willing to grow on your own. We come in and we want to have skin in the game and make this worth our while from an economic perspective, so we’re going to take that minority slice, or maybe even a majority slice, but again we want you advisor team to still have significant skin in the game. But we intend to bring efficiencies to your practice, growth opportunities to your practice and here’s what our strategy is with that and we’d love to talk with you about it.”
So that exists as well, where again minority or majority position, but much more hands-on, or entirely hands-on and here’s why that’s in your best interest advisor or team.
And so you can see how there are different models, whether the amount of ownership, the amount of control, the amount of expectations for efficiencies behind the scenes.
It’s not to say that one is good and one is bad, or one is better than the other. It’s just to acknowledge that there are these different models and that’s a good thing because it depends on your circumstances one day.
If you go into the space and you have your own RIA and wherever you are in your career or the needs you have at that point, maybe you do need more growth or maybe you ready to take some chips off the table or maybe you’re ready to take all your chips off the table.
Just know that there are these different flavors to potentially choose from, and I think we’re only going to see more players in this space come along that are going to come out with a new value prop and a new approach. Maybe models that we haven’t even seen attempted yet. So stay tuned for that.
I think this is a good thing for the industry that all these options exist. But you need to be aware that there are differences. Just because one firm does it one way doesn’t mean that’s necessarily going to be a match for your practice.
To wrap up on, I want to discuss some of the ways that these firms essentially pitch advisors on their offering.
This is by no means an exhaustive list, and I won’t do it justice as the firms themselves do a better job of articulating their value propositions.
One example pitch is so-called multiple arbitrage.
To use very basic numbers, if you have a practice, an RIA that has $100 million (AUM) – again, I’m using very simple numbers – the marketplace will put a particular multiple, usually of your bottom line income, as to how it’s valued.
A potential buyer might come in and conclude a $100 million practice is valued at, and I’m absolutely making up numbers here for the sake of discussion, a multiple of five of bottom line income. Just very, very simplistic.
Well, a billion dollar RIA might have a bottom line multiple value of 10. Again, just making up numbers here.
This is in part because you have very big pockets of money that at times don’t want to even deal with a hundred million dollar RIA because it’s not big enough to move the needle for the capital they must put to work. They want to chase after the bigger players. And because of that there’s a higher value that they’re willing to pay to acquire that much assets all at once.
So in that example, if you have a hundred million dollar practice with a multiple of five, and a billion dollar RIA has a multiple of 10 – again, just making up numbers – part of the pitch for someone that’s trying to put this together is they go and find 10 different hundred million dollar RIAs and they say… “Your equity individually is worth a multiple of five. But with the model I’ve created, if we acquire you and you trade your equity for equity in the bigger piece of the pie, now all of a sudden, if all ten of you come together (and this is very simplistic, not acknowledging that the people who built the model would have a slice as well), and we merge under one firm, now we have a billion dollar firm and your 10% slice of the billion dollar firm now has a 10 multiple, not the five multiple by yourself.”
That’s multiple arbitrage. Solely because you rolled these firms up into one that had a higher total amount of assets, the marketplace gives a higher multiple to magically make each of those individual slices, those individual practices, worth more solely because you rolled them up.
That’s one of the main incentives with some of the roll-up firms.
Another pitch example, and I alluded to this earlier, there are some very experienced operators that have created models and they say… “If you roll up under our firm, whether a minority position, majority or full, we can help you grow faster with all of our expertise and all of our connections, all of our resources, than you could ever grow on your own.”
Whether you find that factually correct or not, it’s up to you. But part of that pitch is… “We can help you grow faster than you ever could. So yes, we take a slice of your pie now, and you give up some of your ownership now, but over the balance of your career with our help, we’re going to help you grow your practice exponentially bigger than you could have grown it on your own. So your remaining piece of ownership is going to one day be worth (again, this is bravado of a pitch) far more than had you kept 100% ownership yourself.”
That’s another example of a pitch often used.
Then the final example, and there is some truth to this, is the RIA model is a scale game.
I talk about this often, If you’re considering starting an RIA, or perhaps joining an RIA (and in this context, I’m not talking about a roll-up type transaction; this is perhaps joining an RIA as a 1099 model – I’ve done several episodes on joining an RIA), part of the decision that goes into that is the RIA model is a scale game.
The bigger you get, the better economics you can have with technology solution providers, with custodians, maybe your compliance costs. The economics get better. All kinds of things where the bigger you get, the math can generally get better.
And so part of the pitch by some of these folks is… “Even if you’re 100 million, 500 million, even a billion, well, guess what? If you join us with 10 billion, or we have 20 billion, or 50 billion, our economics are better because we have way more scale than you’ll ever be able to achieve on your own.”
Everything has trade-offs though. Just because a solution would give you more scale, perhaps better economics, well, that might come with the trade-off of losing some of the control over how the firm operates going forward.
None of these pitches are a holy grail. I’m just trying to help you understand why advisors consider some of these models. There are elements that can be enticing but you would want to fully understand the pros, cons, etc.
As I say frequently in these episodes, there is no golden goose. There is no perfect solution that’s all pros and no cons. I don’t care if you’re joining an RIA, starting your own RIA, going under some roll-up, they all have trade-offs. It’s important that you understand what those trade-offs are and determine what is best for your practice and your needs.
For those first considering a possible transition to the RIA model, it’s not likely that part of your transition would involve going under a roll-up right from the jump. But doing so might be an eventual growth strategy for you, or an eventual exit/succession strategy.
It is important to understand what’s out there in the marketplace. I think we’re only going to continue to see it evolve, which is a good thing. More options, more flexibility. But again, you need to take time and understand how it all differs and how it all compares.
With that, like I said at the top, my name is Brad Wales with Transition To RIA. Talking about this sort of topic is something I do with advisors all day long. I’m happy to have that conversation with you as well.
First things first though, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers.
And at the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me, whether you want to talk about today’s topic or anything else RIA. I’m happy to have that conversation.
Again, TransitionToRIA.com.
And with that, I hope you found value in today’s episode, and I’ll see you on the next one.
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