Purchasing a registered investment advisory (RIA) firm can be a great way to enter the wealth management business. As an RIA owner, you have the flexibility to manage investments and offer financial planning services to clients. However, finding the right RIA firm to acquire requires careful evaluation. You need to analyze the seller’s assets under management, fee structure, client retention rate, compliance procedures, and more. This article provides key guidance on evaluating and purchasing a registered investment advisor firm for sale.
Scrutinize the RIA firm’s Form ADV for red flags
The Form ADV is an important disclosure document all SEC-registered investment advisors must file. Carefully review Parts 1 and 2 of the ADV to check for any disciplinary history or disclosures around the advisor’s services, fees, conflicts of interest, and more. Pay attention to any negative information around custody of client assets, calculation of performance returns, or past client complaints. Also verify the accuracy of assets under management listed.
Examine fee structure and profit margins
Purchase price of an RIA firm often depends heavily on recurring revenue and profit margins. Review the advisor’s fee structure across wealth management, financial planning and other services provided. Gauge profitability based on the advisor’s income statement. Average profit margins for RIAs range widely, typically 15-35%. If margins seem unusually high or low, investigate further.
Evaluate stability of client relationships
An RIA firm’s value lies primarily in its client relationships. Assess stability by checking the advisor’s client retention rate over the past 5 years. Look for any significant client losses and understand the reasons behind them. Interview some current long-standing clients to gauge their satisfaction levels and loyalty to the firm.
Verify regulatory compliance procedures
As an RIA owner, you inherit fiduciary duty and compliance obligations to clients. Carefully verify the seller’s processes for compliance, portfolio management, client data security and more. Document any gaps as they can increase an acquirer’s risks and liabilities.
Purchasing an RIA firm involves rigorous upfront due diligence across clients, personnel, operations, and regulatory compliance. But acquiring an existing base of clients and tap into an advisor’s experience can give your wealth management practice a faster start.