Achieving success and avoiding failure when transitioning to a registered investment advisor (RIA) firm is not black and white. Whether you are looking to purchase an established RIA firm or sell your own, there are a number of considerations. To help you navigate, we put together this useful guide.
Success vs. Failure Part 2: 4 Keys to Success When Purchasing an RIA Firm
Success vs. Failure series: Why Some RIA Purchases Fail and Others Flourish
Part 2 of 2
Registered investment advisor (RIA) firms looking to grow often choose to purchase another firm. But this is rarely a straightforward process. All too often, we see investment advisory businesses rush into a deal only to regret it later. But the good news is there are 4 keys to success you can use to set yourself—and your RIA firm—up for a successful transition.
In Part 2 of this blog post series, based on a podcast we produced with leading SAAS business intelligence platform Truelytics, I’ll take you through these key tips. You can read Part 1 here.
Here are our 4 keys to success when purchasing an investment advisory business:
1. Start with a Strategy
Having a strategy in place—before you begin seeking an RIA firm to purchase—keeps you from reactively responding to the next opportunity that comes your way. At the very least, your purchasing strategy should consider what constitutes a good fit for your firm, both financially and culturally.
In our experience, RIA firms who successfully join forces are compatible across these five areas:
- Culture
- Investment philosophy
- Client demographics
- Technology
- Business vision
2. Find Partners who Complement You
To accurately assess an RIA firm’s culture, you must take a close look at its partners (unless, of course, you are purchasing the firm only for its client base). Ideally, their business philosophy and personalities should complement yours. Finding this out requires ample due diligence on your part.
To start, consider talking to employees to get a feel for how the partners treat them as well as clients. Pay attention to how their representatives speak to clients on the phone and what they say about them behind their backs. Then, ask yourself the tough question: Will I truly enjoy working with these people?
3. Make Sure Your Business Practices are Aligned
The ideal alignment will depend on your strategy—that is, the reason you are purchasing an RIA firm. Are you looking to tap into a new client demographic, or do you wish to offer new products?
It’s also critical to look at how the RIA firm does business. Has it experienced regulatory issues? Has it been party to lawsuits, or is there pending litigation?
4. Develop an Implementation Plan
For a smooth transition to occur after the deal has been signed, a detailed implementation plan must be in place. This plan should be developed early in the process. At a minimum, it should lay out the terms of the transition, the role of the selling RIA firm’s owner, and the individual in charge of the transition.
Get Support for a Successful Transaction
If you’re considering purchasing or selling an RIA firm, Elevate CPA Group can help. As financial services industry specialists, we assist investment advisory businesses with everything from cash flow planning and projections to providing outsourced tax services.
Our CPAs are available to guide you through the merger or acquisition process, steering you clear of pitfalls and toward success. Contact us today.
Success vs. Failure Part 1: Pitfalls to Avoid When Purchasing an RIA Firm
Success vs. Failure Series: Why Some RIA Purchases Fail and Others Flourish
Part 1 of 2
The sale or purchase of a registered investment advisor (RIA) firm can be complicated. Some transactions seem like they were meant to be, while others fall apart in no time. So, what gives? Could there be a secret ingredient that makes selling or purchasing an RIA firm successful?
Although I wish it were that easy, the answer is no. The success or failure of an RIA firm purchase or sale depends on a number of factors. In this blog post series, based on a podcast we recently produced with the leading SAAS business intelligence platform Truelytics. I’ll discuss the ins and outs of successful—and not-so-successful—deals involving investment advisory businesses.
In this post (Part 1), I’ll share pitfalls to avoid, so you can spot red flags before you get too far along in the process.
Here are 5 pitfalls to avoid when purchasing an RIA firm:
1. No Shared Vision
All too often, firms purchase another firm out of growth ambitions alone. Buying for this reason alone may not result in your desired outcome. For a deal to be successful, the two RIA firms involved must be compatible. This could mean they have commonalities in the type of clients they serve or products they offer, or it could mean they share similar business values. Most important, the two firms must have a shared vision for the future.
2. Lack of Open Communication Throughout the Process
Don’t be satisfied with the dog and pony show. If you’re entering into a deal with another RIA firm, it’s important to have tough conversations that get to the heart of each owner’s needs and expectations. Build trust before signing on the dotted line, so you can feel confident about what you’re getting into.
3. The Seller Won’t Let Go
If you’re purchasing an RIA firm and the owner insists on retaining control of certain aspects of the business, this could be a red flag. In order for the deal to work—for the two firms to be compatible—the seller needs to accept the buyer will be the one in charge.
4. Poor Client Communication
One of the risks associated with purchasing an RIA firm is that its clients will leave after the deal goes through. To prevent this, it’s important to keep clients apprised of the transition. Sending an initial announcement followed by weekly updates is a good start. Be sure to give clients plenty of notice and support for any administrative changes. If the seller hasn’t or isn’t willing to keep clients in the loop, these clients are likely to feel ignored—and ready to jump ship.
5. Lack of Strategic Focus
It’s bad enough when one firm doesn’t know where it’s going. Adding another firm to the mix could make the situation even worse. This is why it’s critical to have a strategic meeting between both RIA firms early in the process. Make sure everyone is on the same page—and this goes for owners within the same firm, too. If agreeing on a focus becomes a challenge, it might be time to walk away.
Get Support for a Successful Transaction
If you’re considering purchasing or selling an RIA firm, Elevate CPA Group can help. As financial services industry specialists, we assist RIA firms with everything from cash flow planning and projections to providing outsourced tax services.
Our CPAs are available to guide you through the merger or acquisition process, steering you clear of pitfalls and toward success. Contact us today.
Top 3 things to discuss with your clients before year-end
For most people, the end of the year is synonymous with holiday celebrations. For CPAs, it’s also a time for tax planning. This is because taking certain actions now—before December 31—can go a long way toward helping our clients maximize their tax savings. If you haven’t already, now is a good time to reach out to your clients to discuss the following three things:
Options for charitable giving
With the higher standard deduction and limitation on state and real estate taxes, charitable giving doesn’t offer much of a tax advantage. Bunching charitable gifts (and subsequently, deductions), however, can make a measurable difference. For instance, if your client usually gifts $10,000 a year, they may want to consider gifting nothing in 2020 and taking the standard deduction, and then gifting $20,000 in 2021.
Clients who are 70½ years or older may want to consider making a charitable contribution in 2020 using an IRA Qualified Charitable Distribution. This is a great way to forever avoid taxable income on the IRA assets. Taxpayers over 70½ years old can gift up to $100,000 a year using this method.
Your client can also gift long-term (i.e., held for more than one year and one day) publicly traded stocks to charity. The deduction would equal the fair market value of the stock, and your client would avoid capital gain. Keep in mind this opportunity does not apply to publicly traded partnerships, other limited partnerships, or LLCs.
Timing for the sale of stock
We don’t know what’s going to happen with tax rates in the new administration. But we do know tax rates for 2020. The question becomes: Should your client sell stock now and take the income in 2020, or wait and see what happens next year?
Clients who have concentrated positions may want to take advantage of lower brackets in each year. With ISOs for instance, splitting the sale between 2020 and 2021 could help to avoid or minimize AMT. Clients holding NSOs may want to exercise their options in both 2020 and 2021 to take advantage of the tax brackets as much as possible.
Coronavirus-related distributions from retirement plans
A provision in the CARES Act allows qualified individuals to take up to $100,000 in distributions from eligible retirement plans before December 31, 2020—without incurring early-withdrawal penalties. The distributions must be paid back within three years, and the income can be spread equally across 2020, 2021, and 2022.
The two key words here are “qualified” and “eligible.” Only individuals who meet certain criteria for being adversely affected by COVID-19 will qualify for this relief measure. Likewise, these individuals may take distributions from only eligible retirement plans (as outlined in the CARES Act).
The clock is ticking…
Thankfully, 2020 is almost behind us. If you haven’t already, consider bringing up these points to your clients and working closely with your tax advisor to implement a tax planning strategy as soon as possible. At Elevate, we provide back-off tax advice for RIA clients to help streamline the process. If you have questions or would like to learn how we could help you position your clients for a better 2021, contact us today.
Avoid these 3 pitfalls when applying for PPP loan forgiveness
As we near 2021, many business owners are wondering when they should apply for Paycheck Protection Program (PPP) loan forgiveness. This is but one piece of the puzzle. The other is the loan forgiveness application process, which could be complicated for certain applicants.
To help your RIA firm achieve the greatest level of forgiveness possible, here are three pitfalls to avoid as you work through the application process.
Failure to meet the PPP employee retention requirement
A key requirement of full PPP loan forgiveness is that your staffing levels (i.e., the average number of full-time equivalent “FTE” employees on your payroll) must stay the same or higher from the date the loan is originated to the earlier of the forgiveness application date or December 31, 2020 throughout 2020. Your PPP loan will likely not be forgiven in full if your retention dropped. That said, there is an exception to this requirement: You made a good-faith, written offer to rehire or replace employees, and you were unable to accomplish either.
A note about this exception: If this happens to you, you must inform your state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. You must also maintain certain documents to demonstrate compliance with this exception, including the written rehire offer, a written record of the offer’s rejection, (remove comma) and a written record of efforts to hire a similarly qualified employee.
There is also a safe harbor that could protect you from a reduction in loan forgiveness. To qualify for the safe harbor, you must meet the following two conditions: (Delete sentence)
- If you reduced your FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020 and
- You restored your FTE employee levels by December 31, 2020, to your FTE employee levels during your pay period that included February 15, 2020.
The bottom line here is the importance of documentation. If you haven’t already, make sure you have the right records in hand that will show your good-faith efforts in maintaining FTE employee levels.
Excessive owner compensation
The amount of compensation of owners, shareholders, and partners that is eligible for forgiveness depends on several factors. Generally, owner-employees applying under a 24-week covered period can request forgiveness for up to $20,833. The maximum forgiveness amount for employees who earned more than $100,000 on an annualized basis using a covered period of 24 weeks is $46,154. Make sure you’re requesting the correct amounts of forgiveness for each owner, shareholder, partner, and employee on your application.
Missing key paperwork
Lenders are typically requesting the following paperwork to be submitted with the loan forgiveness application:
- Payroll detail reports (by employee) for each payroll during the covered period. This amount should equal the amount of payroll costs during the covered period, less the downward adjustments for employees who made over $100,000 on an annualized basis and any owners/shareholders/partners.
- Quarterly IRS Forms 941 for the covered period.
- State unemployment filing related to your obligation during the covered period.
Also, if your firm, together with its affiliates, received a PPP loan greater than $2 million, you will be required to complete a separate “loan necessity questionnaire” and submit it to your lender.
A final note about paperwork: Borrowers must complete SBA Form 3508 to request loan forgiveness. Form 3508EZ is the shortened version; only borrowers who meet certain requirements may use it. It’s worth checking to see if you’re eligible to use Form 3508EZ, as it’s much easier to complete.
Set yourself up for PPP loan forgiveness success.
An accurate PPP loan forgiveness application is critical to achieving full forgiveness. If you’re feeling overwhelmed with the process or aren’t sure where to start, Elevate can help. Contact us today.
