As ever larger RIA rollups hog M&A deals, Andy Grillo launches cheap robo-service to help mom-and-pop battle 'inaccurate' valuations; color RIA bankers unimpressed

Fabe Assist promises to scratch an itch RIAs didn't know they had, knowing more about themselves before they entertain buyers. But experts say valuations are too human and too emotional for machines to make inroads.

By: Oisin Breen - RIABiz

A robo-RIA M&A firm has launched from tiny Mt. Kisco, NY, to redress the yawning sophistication gap between mom-and-pop sellers and big-time buyers, who mostly scoff at the software startup.

Fabe Assist entered the market in April asking sale-minded RIAs to plunk down $3,400 then buckle down for three hours to answer 47 questions. It may be a bargain in a market where acquisition fees can soar from hundreds of thousands to millions of dollars.

To date, more buyers than sellers have signed up for Fabe's software. But interest from both is growing, according to the firm. Buyers pay a subscription fee for a comparative analysis of firms in the purchase pipeline.

The Fabe questionnaire zeroes in on an M&A blind spot, namely client mix, according to former Smith Barney executive and firm founder Andy Grillo, who has filed patents for its software algorithm.

"The way most firms evaluate businesses comes right out of business school. If you have a total of 165 relationships, 80% of the value may be from 35 of those, so a traditional business means of evaluating doesn't seem like it's enough," he says.

The robo-evaluation arms an RIA with a cheap, organized, data-based talking points to counter fast-talking buyers, he explains. 

Indeed, Fabe need only convince users it can justify $3,400 average fee -- a line of reasoning supported by the company's money back satisfaction guarantee.

In contrast, for deals up to $5 million in value, roughly equivalent to an RIA with $250 million in assets under their management (AUM), M&A advisors can levy a fee between 4% and 6% of the overall deal value. The figure rises or falls, depending on the value of the deal.

Serious doubters

Fabe declined to reveal its headcount or client count, but unusually for a firm fresh out of the gates, it is in the black, according to Grillo.

"We are immediately profitable … [and this year] should I decide to raise more capital it would be for marketing [because] as of now, we’re generating a good amount of leads," he says, via email.

"[A] 2022 capital raise is possible, but only if it improves our ability to scale client service," he adds.

Grillo owns a majority stake in Fabe, although he raised an undisclosed amount of capital from friends and family. Fabe also takes a leaf out of the broker-dealer book and incentivizes sales staff through a heavily commission-driven model, with top contractors receiving stock options.

Yet some RIA dealmakers balk at the idea that the automated M&A data cruncher is more than another middle-man trying to squeeze its way into a red-hot market. And, forget that it can outperform them quantitatively and qualitatively, as Fabe asserts in a release.

It's hard to believe it can offer much value to RIAs, says Jim Melland, chief lending officer at Wayzata, Minn., RIA lender SkyView Partners, via email.

"[RIAs] have spent their entire careers building a business. It’s hard to say that a computer algorithm could solely determine the value of what they’ve built. Interpreting the data and its value requires a human element," he asserts.

"Given the emotions of buyer and seller ... those involved need serious human interaction, listening, and frankly therapy," says Dan Seivert, founder and CEO of Los Angeles-based investment bank and valuation services firm ECHELON Partners, via email.

"Most advisors with more than $100 million in AUM want strong elements of trust, responsiveness, human interaction and a relationship with a person or firm that knows their family and company and all of its related details," he continues.

For potential users on the buy-side, Fabe will also find traction hard to come by because it won't help buyers get credit, according to Nick Arellano, managing partner at rival Hermosa Beach, Calif. valuation and consulting firm Your Legacy Partners.

"I don't think banks or lenders are going to be willing to rely on a software product valuation" he says.

Ephemeral satisfaction

A quick-and-dirty approach can be counterproductive, if it overvalues firms or over-inflates seller expectations, adds Seivert. 

"Smaller advisors often love tools that are cheap, easy, fast and skewed toward over-valuing their books ... [but] the sense of satisfaction is ephemeral," he argues.

"[RIA] importance is more accurately measured in what they create, AUM, retention, revenues, profits, scale, growth," he explains.

Indeed, roll-ups bought up just under half of the 76 wealth management practices sold in the first quarter of 2021, even as deal numbers soared 65% when compared to the first quarter of 2020, according to the latest Echelon report.

In the release detailing its launch, Fabe asserts that it "challenges" traditional RIA M&A services and the models they use to establish valuation by employing a weighted approach.

That includes a "biography" of an advisory practice and its clients that bases a significant degree of its valuations by measuring the top 20% of an RIA’s client roster.

Justifying the price

Yet, there's no guarantee that walking into the deal room with Fabe data will assure principals of a good deal, says Scott Wetzel, CEO of SkyView, a boutique investment bank focused exclusively on independent and registered financial advisors.

"Historically we have found that programmatic valuations produce outcomes that are far below what we believe is true market value," he says, via email. 

Fabe calculates valuations based on factors including breadth of service, attrition risk and more standard cash flow and revenue metrics. In addition to valuing RIAs, it compares sale valuations of firms with similar AUM for both buyers and sellers.

"We don’t find a large disparity in valuations when we review. Our detailed questions enable the seller to justify their asking price by highlighting specific strengths of their practices," Grillo explains.

"This justification can also be used when negotiating earn-out terms, or equity in the acquiring firm in lieu of partial cash payment," he adds.

Today, RIAs already pull in 20% more cash on the first payout than they did two years ago, according to a report from Advisor Growth Strategies in Phoenix,  a management consulting and transaction advisory firm.

Struggle with accuracy

RIAs upload data on their business into Fabe, either by hand, or through voice-recognition software -- a process that takes up to three hours.

Beyond biographical client details, Fabe’s analysis draws on three years of audited financial data, including income statements, balance sheets and cashflow statements.

RIAs also receive valuation bumps based on how widely they employ financial planning, among several other factors. The company weighs client age, an RIA’s relationship with likely inheritors, and potential growth, among at least a "dozen" factors, according to Grillo.

But Arellano says his firm tracks at least 40 factors using human evaluators, who take into account the kind of minutae software simply can’t.

People are the critical factor in valuing an RIA -- something it takes people to assess, he says.

"Each firm has unique attributes that differentiate it from others, which are nearly impossible to capture without humans."

"There are strengths to be measured, risks to be assessed, adjustments to be made to historical and projected financials, and compensation structures and business models that need to be factored in," he adds.

Learning RIA client biographies is part of the M&A process, but leaning on it can lead to inaccuracies, Seivert cautions.

"When it comes to valuation, technology-based tools struggle with accuracy ... [they] aren't able to conduct pro-forma adjustments associated with income statements which require humans, wisdom, and high-quality interviewing, listening, and judgement skills," he says.

The arbitrage

"Way too often transactions are inaccurately priced, as traditional valuation models rely heavily on current year’s multiples or discount rates, failing to incorporate the true value of the client relationships that comprise a book of business," Grillo counters critics, in a release.

Don't blame investment bankers for failing to achieve Fabe's precision, he adds in an email.

"I wouldn’t present Fabe as a tool to keep M&A guys honest, since I believe most if not all M&A firms are doing the best they can with the data they’re provided," says Grillo.

Yet Arellano says Grillo is right to see a niche for a firm that bridges the gap between mulling a sale and going full-throttle.

"This could possibly be used as a first-step comparative tool. Then, if it looks good, the humans will do their additional in-depth assessment," he says, via email.

Grillo can live with that assessment. It's the missing pre-cursor to human M&A analysis, he says, "designed to improve output quality. It isn't a replacement for hands on valuation."

There’s also an increasing pressure on RIAs to have deeper knowledge of their own value before committing to the sales process, given the volume of interest from buyers, according to Advisor Growth Strategies.

"Seller-friendly deal structures and a dizzying array of options exert pressure on RIAs to become aware of the M&A landscape. Sellers need to know what they’re getting into, and buyers need to understand what they are acquiring," the company states in its latest report.

Roll-ups, alone, did 35 deals with an average of $2.2 billion in the first three months of 2021, according to the Echelon Partners data.

The average RIA sale, at a revenue-to-valuation multiple of 2.6 is priced at $59.8 million, using and average 2021 AUM at point-of-sale of $2.6 billion, according to a back-of-the-envelope calculation derived from Echelon data.

Scalable model

Seivers adds that the language Fabe uses belies a firm more interested in its own bottom line than its usefulness to RIAs.

"Software as a service [SaaS] companies have been a very popular business model for over 15 years. Those who know the model and the associated valuations and private equity interest are motivated to apply to any and every sector in the economy. [Fabe] has all the earmarkings of SaaS lover looking for a place to happen," he says.

"It is [also] worth noting the large number of [Fabe] executives that are mostly sales types, from academia, or have functional expertise outside the industry … These structures are a harbinger of tough sledding ahead," he explains.

Maybe, but the SaaS model might just be the perfect fit, and one RIAs will intuitively understand, says Arellano.

"It’s extremely attractive and valuable for owners … [and] such a scalable business model … not too much different to why advisors like fee-based revenue," he explains.

Fabe also doesn't have a strongly established moat, adds an investment banking source, who says at least one "human" competitor is currently considering rolling out a robo-valuation tool as a supplement to its own service, and that if it does, it will come at "minimal development cost."

"Fabe may be first, but [it] won’t be alone. Other quality firms will develop similar solutions," Grillo allows.

Undeterred

Yet Fabe is undeterred by the competition, whether it comes through the open market, or from analysts in-situ at major buyers, according to a company spokesman.

"We have a straightforward mission, to become the industry’s go-to source to determine the most accurate valuation of financial advisory businesses," he says, in a release.

Fabe is being started out of Grillo's wallet for now and has eight people on staff -- including CFO, Mark Kaufman. His background includes some M&A experience.

Grillo is best known as a close colleague of Frank Campanale at Smith Barney where they pioneered managed accounts.

The two pals founded a wealth management startup that began by purchasing the old E.F. Hutton brand. That venture faltered and the two men rolled to Lebenthal Wealth Advisors, where Grillo was president and chief operating officer (COO).  It also struggled. See: Alexandra Lebenthal, with help, cheats business death again.

Grillo's current partners include another Campanale Smith Barney sidearm, Bevin Crodian, who doubles as COO and CEO of FINCastle consulting. 

His senior team also includes retired attorney John Lohr, Fabe's corporate counsel and principle partner.

To view the original article featured in RIABiz, please visit:

https://riabiz.com/a/2021/6/1/as-ever-larger-ria-rollups-hog-ma-deals-andy-grillo-launches-cheap-robo-service-to-help-mom-and-pop-battle-inaccurate-valuations-color-ria-bankers-unimpressed