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This article is the fifth installment in a multi-part series exploring the issues Jim Whiddon faced as he decided to sell his practice. To access all the articles in this series, please click on “more by the same author” in the left margin.
Before I made the difficult decision to merge my registered investment advisory (RIA) with a larger partner in 2013, I took one last look at the pros and cons.Despite all the positive aspects my research turned up, I hesitated over some lingering issues that were important to resolve. And while the bottom line was compelling, many of my concerns had to do with the psychological effects of the move, both for me and for my clients.
Emotionally, after more than a quarter of a century leading my firm, I had to come to terms with the fact that I’d no longer be completely in charge. I’d be foregoing some of the positive benefits of being the boss – including possible financial upside.
Another consideration that warranted some reflection was the possibility that our clients might prefer a smaller firm in the same way one might prefer a small, local bank instead of a large, national institutional bank. I concluded that while some clients were definitely with us because they felt that our small size created a unique “boutique feel,” they comprised a small minority of our book. For most of our clients (especially the older ones), we determined the financial stability of the firm they are dealing with was more important. For the clients who worried that economic difficulty was ahead of us, larger meant more stable. This was especially true of Baby Boomers who were raised by Depression-era parents. Even better, my fears turned out to be unwarranted. The same small and flexible feel is still present in our business post-merger when it comes to day-to-day client interaction, because the only thing that changed in that respect was the name on the door.
Another concern was that some clients might see the merger as a sign that I was personally on the way out the door. I was able to ease that concern because many of them understood that at my age, 52, I had more working years until retirement. An owner in his or her mid- to late 60s might have a more difficult time alleviating those client worries. The older a principal is, the more difficult it will be for him or her to stick around after the transaction and retain clients – which affects the value of the transaction payout and provides the stability and peace of mind that clients deserve to have.
My final consideration concerned the bottom line. On a personal level, I examined the deal as a portfolio decision. There is no doubt that keeping the firm at my age likely meant more net dollars for me over the next decade or so – all things being equal. But with the threats – both internal and external – that my firm faced, I decided to take risk off the table, just as I might in a portfolio. My RIA was the largest asset in my personal portfolio – a closely held, illiquid position that was diversifiable with a merger. I viewed the decision as a risk/reward calculation.
After counseling clients on this topic throughout my career, it was time to take my own advice!
Owners of small firms are very susceptible to the extrapolation fallacy that we so often fervently preach against. That is, we look at the current state of affairs in our industry (or in the market) and extrapolate that the trend is going to continue. If not careful, we can experience a sort of temporal mirage. As relatively easy money rolls in with great margins, we are tempted to overindulge and underexplore our options until they become limited.
Much like the way our nation was formed with states coming together to form a “more perfect union,” the independent advisory world can greatly benefit and eventually dominate our industry through the consolidation of entities, ideas and resources. But no matter your size, growth in business is always the key to success. For owners who wish to stay independent, beware of the “stay small” or “lifestyle firm” mantras. Companies that don’t grow implode upon themselves more often than not. It may be slow, but they eventually weaken and die. Without growth, they cannot do anything else.
My research was exhaustive and spurred a financial and emotional evaluation of my life’s work. But when it was over, it was clear that I owed it to our clients, my team, my family and myself to solve the problems inherent with a small, independent advisory firm – and to seek the advantages that could come with a merger.
Even if nothing comes of it, doing the same research will give you the confidence that you have done your due diligence and acted in the fiduciary manner to which you are committed. I encourage you to engage in the process. The best answer will present itself for your particular situation. In my case, with the stroke of a pen on July 1, 2013 – literally overnight –I stepped into a brighter future of greater security and prosperity. It may be time for you to do the same.
James Whiddon, CFP, MSFS is a wealth advisor with Buckingham, an independent member of the BAM ALLIANCE. Buckingham provides wealth management for individuals, businesses, trusts, not-for-profits and retirement plans. He is the author of two books: Wealth Without Worry and The Investing Revolutionaries.
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