The registered investment advisor industry continues to report declining organic growth numbers, and many firms struggle to generate earnings above those of the stock market. With the lure of a capital infusion from private equity investors dancing in the heads of RIA owners, the pressure to grow can be deafening. While the average age of advisors in our industry continues to rise, so does the average age of clients, meaning more of them are reducing their portfolios than adding to them. Some RIAs need to bring in $100 million or more in new assets each year to break even and offset the decline in client portfolios. When the engine of organic growth stalls, many firms turn to mergers and acquisitions, thinking, “If we can’t grow through our sales and marketing efforts, we should acquire assets to increase our AUM numbers.”
This tactic can work, provided the RIA thinks strategically about the type of clients and advisors they want to attract. But before flipping the switch from organic to inorganic growth, it’s important for company leadership to take stock and make sure they’re set up for success. First, do you have the right marketing materials to attract advisors? When RIAs make the decision to attract advisors in addition to clients, they often mistakenly fall back on the same pitch pack they’ve been using to attract clients for years. When attracting advisors, your message to end clients is important, but it’s not as critical to an advisor as the operational story you have to tell. It’s imperative that you show the salesperson that once they join your firm, you’ll be taking over their operations, compliance, HR, investments, etc., and they can return to focusing solely on client relationships and their business development efforts.
It’s also important that your firm is operationally set up to successfully handle the sudden influx of new clients and accounts that will come about as a result of your M&A activity. The best way to ensure this is to examine how your firm supports its organic growth today. If new clients complain that it takes weeks to open accounts and transfer assets, you need to eliminate these internal inefficiencies before pursuing an inorganic growth strategy. If it takes six to eight weeks to bill client accounts after the end of the quarter, your firm is not ready to support new advisors and their clients (and you won’t be successful in attracting advisors either!). Reporting is another area that needs to be addressed. If you can speak to a specialized group within your firm that handles performance reporting and checks the quality of reports quarterly and ensures they are sent to clients and/or posted to a portal on time, you’ll be one step ahead of other buyers.
Other signs that your operations aren’t supporting your current growth include repeated trading errors due to miscommunications between client service teams and trading teams. If client portfolios aren’t being implemented or rebalanced as intended because instructions between teams simply slip through the cracks or are misinterpreted, don’t expect things to magically improve when you dramatically increase the number of portfolios to manage when a firm or team of advisors joins your organization. If your company’s client relationship manager is nothing more than an Outlook contact database or a file server that contains documents shared with clients, you may not be able to scale your business and support more client relationships. You need a central repository where all employees can access client meeting notes and client communications.
While mergers and acquisitions can be a viable strategy to increase AUM numbers, it’s critical to ensure your firm manages its current processes and supports your existing clients before pursuing an inorganic process. This includes having the right marketing materials to attract advisors, as well as the operational readiness to support the influx of new clients and accounts that comes with mergers and acquisitions. Internal inefficiencies such as delays in account opening, billing, reporting, and miscommunications between teams should be addressed to ensure a smooth transition and successful integration of the acquired assets. Additionally, a robust CRM system and central repository of client information can help scale the organization and nurture more client relationships. By taking these steps before pitching as a buyer, an RIA can position itself for sustainable growth and long-term success, both organically and inorganically.
Matt Sonnen is Chief Operating Officer at Coldstream Wealth Management and founder of The COO Society, a digital advisory platform that teaches RIA owners and operations professionals how to build more impactful and profitable businesses. He is also the host of the popular podcast COO Roundtable
