RIA M&A: Risk Concerns for Sellers

Even as interest rates rise and economic uncertainty persists, merger and acquisition (M&A) activity within the RIA space remains robust. There are now, more than ever, clear processes laid out by several serial buyers who have done multiple acquisitions over the past 10+ years. But what about the seller? This may be the only M&A deal of this sort that an RIA business owner does in their entire career. It is also very likely their largest singular financial transaction. What are some of the key issues to address concerning the liability around such a transaction for them and their interests?

In the consideration of a practice merger, acquisition, or sale – what exposures might such activities present to principals/fiduciaries? Below are several questions that one should ask themselves when being acquired or merged away:

• According to the buy-sell agreement, who is responsible for the liability of past acts? How is indemnification of future possible events/claims managed and funded?
• How will the relationships of the acquired firm be transitioned into the acquiring firm? Have these clients been advised in writing of the merger or acquisition?
• What insurance coverage will protect the firm when not selling any liabilities? Would it be possible to “sell” certain liabilities?
• How does my current insurance portfolio respond to claims made post-acquisition? Are there costs to be expected to cover past activities?
• Is the withdrawal of an entity’s regulatory registration required? If so, when will this be effective? Should active insurance remain in force until withdrawal (ADV-W)?
• How might the transaction affect the “Material Change” clause within my insurance contract? Could the transaction nullify insurance coverage? (See our “Material Change” Risk Tip for further clarification.)

Each deal is unique, but you as the acquired firm have a say in these important details. A firm being acquired should consider the possibility of a suit being brought by clients for past activities or as a result of the M&A transaction (such events have been known to trigger claims should third parties determine their timeline for alleging fault is being exhausted). Where does the liability reside after the acquisition occurs? Is the acquired entity then dissolved? Were reasonable terms arranged (done at coverage inception) for the entity’s right to purchase an extended reporting period/tail coverage from the insurer?

There is indeed much to ponder here, and we realize we are presenting far more questions than answers — but these questions are important to compile as you begin looking for answers. It is critical that you have experienced counsel to walk you through your specific circumstances and guide you appropriately.

The article was recently published in “IAA Today” Newsletter on July 27, 2023.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.

At Golsan Scruggs, we believe it is incumbent upon us to earn the right to be appointed as your insurance and risk-management agent. Our RIASURE process exists to serve that purpose.

Our RIASURE Review will analyze your fiduciary exposures, provide rate details and comparisons, and provide a contract comparison. No application required.

To obtain your complimentary RIASURE Review, please provide the following information or contact us at (800)273-5883. Fields marked with * are required.