Beautiful Carlsbad, California, was the setting for the GRPAA 2022 Industry Leaders Summit, which kicked off Saturday morning with a panel discussion on the hot topic of mergers and acquisitions in the 401k advisory space.
“I’ll take all of your ideas, bundle them, take credit for them, and then win awards,” GRPAA Founder Bill Chetney joked. He then introduced two M&A experts, The Retirement Advisor University (TRAU) Founder and Executive Director Fred Barstein and Wise Rhino Group CEO Dick Darian.
Chetney noted that when he sold his first business, NRP, the deal was 50% in cash and 50% illiquid, non-publicly traded company stock. Today, advisors get 90% in cash and eight to 10 times EBITDA.
“Any fragmented industry that can consolidate will,” Barstein said, referencing “The Consolidation Curve,” Harvard Business Review’s seminal 2002 article. “It’s inevitable, like gravity.”
Adding that there are four stages of consolidation, it typically ends up in the fourth stage with five to eight firms controlling 80% of a marketplace. Yet it’s still early for advisory firms, who find themselves in the second stage with “lots and lots of deals.”
“It’s hard for advisors to see the next stage when you’re in the current stage, but it acts as a prelude to the next, in which there are fewer deals.”
Darian added that before consolidation can occur, there must first be an industry. “It takes roughly 20 years for an industry to mature, and then you have to have firms that are ready to be acquired.”
On the buy-side, he noted that aggregator CAPTRUST had acquired 55 firms, most of which were in wealth and retirement.
Mentioning the “Goldilocks Zone,” or the habitable zone where it is not too hot and not too cold for a planet to potentially sustain water and life, he sees the same thing happen in M&A.
“You have firms that are big enough and talented enough of the sell side, “Darian explained. “On the buy-side, there are a growing number of firms backed by private equity with cheap money that create an environment for it with an economy that, even with the pandemic, has been consistent and solid. Rarely do you see all those things happening at once.”
Yet even if the conditions are right, the advisor might not be ready to sell, and Darian added that he’s more of a rabbi than a banker.
“We spend a lot of time talking about whether it’s the right thing to do. Only about a quarter of advisors say they’re ready, so there’s still a long way to go.”
Barstein argued that COVID is a catalyst for enormous change, especially with technology and the remote work and meetings it caused, as well as the Great Resignation.
“We’re now in a war for talent,” he said. “Employee benefits are key to recruiting and retention, and the C-suite gets that. It used to be fees, funds, and fiduciaries, but how do we get from the waiting room to the boardroom? We’re there. It’s through the convergence of health, wealth, and benefits.”
He quoted Strategic Retirement Partners’ Jeanne Fisher from a recent webinar, “I’m not a retirement plan advisor, I’m a financial benefits advisor.”
Darian agreed, adding that if aggregators do what’s planned and offer OCIO services while giving the “3 Fs” for free, they’ll reach the 1% of the population with money and the 99% that is typically underserved, something against which it will be very difficult to compete.
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