Investment Advisory (RIA) Firm Merger & Acquisition Success

One question I get quite a bit from my growth client base is “Do you know of any advisors looking to retire and/or sell their practice?” My response is “Not at this time but I am aware of a number of advisors that talk a lot about selling and/or retiring. I’ll keep you in mind if I hear anything.” My experience is that most mature small shop practices (less than 3 employees) that have no desire to grow their existing business also show a lack of desire to sell their practice.

This is not the case however with larger RIA firms that have in excess of 5 employees and over $100mm in AUM.  There is actually a lot on M&A activity in this space.  A big reason for this is that the parties involved are for the most part removed from the relationship with the client base. The client base tends to be HNW and is comfortable with the current model.  These firms will lean to merge or acquire firms that are using the same custodian. This makes the transition simple and almost effortless.

As a compliance firm we are intimately involved with our client’s personal goals and the goals of their practices.  Our experience has been that older advisors are very much aware of their situation and know that the time is coming when they will call and ask us if we are aware of potential suiters. These advisors have built their practices on relationships and are not against discussing a merger or acquisition but are interested in finding the perfect fit.

Larger advisory firms ($250mm+) that have an infrastructure that can support a seamless merger or acquisition could look to their custodian for potential buyers or sellers.  Once a firm is identified it is a recommended that the Principles and the CCOs sit down to discuss the potential merger or acquisition.

Smaller advisory firms (-$150mm) with a limited infrastructure tend to be more relationship based and therefore relationship driven. They tend to gravitate to firms with a similar geographical location, firm culture and investment structure. This makes finding sellers a bit more difficult as younger, less experienced firms that want to grow through acquisition tend not to be an attractive suitor to more established firms.

Determine An Investment Advisory Firm’s Valuation

The common denominator to both parties is “THE RETENTION RATE”. Retention rate refers to how long a client will stick with the new firm.  Both parties should have a vested interest in a very high retention rate and should do everything in their power to make sure that every conceivable issue has already been discussed and vetted before the merger and/or acquisition is finalized.

A good “Rule of Thumb” for the value of a practice is around 2% – 3% of aum (assets under management). Most other variables such as expenses and fees charged can be manipulated.  A firms expenses can be significantly reduced or even eliminated if preparing for a sale making the firm seem more profitable. This is why the rule of thumb valuation is the best place to start when negotiating a merger or acquisition.  Other factors that come into play are the age and size of the client base.


  1. A firm that has 100 clients with an average age of 65 yrs old and aum of $100mm is an attractive acquisition and will most likely bring a significant premium over and above the 3% rule of thumb (upwards of 5% of aum).

  2. A firm that has 1000 clients with an average age of 75 yrs old and aum of $50mm is not an attractive acquisition and will most likely be valued at the lower end of the rule of thumb.

These examples are both outliers, the 2 examples give you a baseline knowledge of why the rule of thumb valuation of 2.5% is a great place to start negotiations. As mentioned earlier, expenses should be limited and in most cases eliminated during negotiations. The areas that should be discussed are the areas that do not have a monetary value associated with them. These areas should include existing client relationships, client age, client health and client referral potential.


Advisory firms that are interested in a merger or acquisition should look toward existing relationships that they have already established with their business partners (custodian, compliance, TPA).  This is because a business partner has a vested interest in retaining existing business and a successful deal could also result in referrals to that business partner.