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Many advisors would greatly benefit from scale yet are hamstrung by the very temperament that led to their success in the first place.
That was the premise behind a highly successful television show four decades ago:
“If you have a problem, if no one else can help, and if you can find them, maybe you can hire the A-Team.” Grew up in the 1980s? Then you remember the A-Team: Hannibal, Face, Murdock and of course B.A. Baracus (Mr. T!). Each team member had a specific skill that acted as a ”force multiplier,” allowing their team of four to defeat more numerous enemies… which they did on a weekly basis for five seasons! It was a classic case of 1 + 1 = 3.
What business wouldn’t like that math?
Yet in the financial planning profession, most advisors are solo acts – akin to Rambo. Partnerships are common but are often formed at the beginning of advisors’ careers when safety in numbers is a good survival tactic.
Today’s headlines are awash with news of hundreds of firms acquiring and being acquired, but we don’t hear much about mergers. In fact, I have heard it said, cynically, that there’s no such thing as a merger, only an acquisition without one side knowing it. If a successful partnership or merger could achieve scale more quickly and reliably, why are proper mergers among advisors so rare?
For starters, the financial advice profession encourages independence, self-reliance and competitiveness. Without those traits, young advisor trainees might not even get out of the stable. On the other hand, a merger requires collaboration, humility and trust.
Ask a room of growth-minded advisors if they are interested in acquiring a book of business and most hands would likely go up. Ask the same group if they’d be interested in a merger, far fewer hands would rise. Acquisitions are easier. The buyer writes the check and gets to call the shots. Unfortunately, acquisitions are incredibly difficult to source and win. It is easier for an advisor to get acquired by a $10 billion roll-up than to choose one person to align with permanently.
If acquisitions are so hard to pull off, an advisor might continue to pursue organic growth, but there is risk in that path as well. Our profession is consolidating. Whether deliberately or through inertia, advisors are picking sides: On one side are small, lifestyle practices whose playbook is to establish a niche and maintain great client relationships (with the certainty of a sale at retirement). On the other side are mega-RIAs, the biggest of which are over $250 billion in AUM.
The middle is a dangerous place.
Firms offering traditional comprehensive planning and investment management may one day be weakened by competition from well-managed enterprise firms. Those firms will offer tax, estate, life-coaching and family office services to smaller and smaller clients and do so efficiently via the use of process and technology. Small firms will fall behind or become more and more dependent on partners like Schwab or LPL.
Looking deeper, most firms above $1 billion AUM are not solo acts. These firms have not only institutionalized client acquisition, they have also systematized practice acquisitions, with the money and staff to repeat indefinitely.
Advisors who want significant growth and scale but refuse to be acquired should consider the path of merger.
Yet sourcing, negotiating, consummating and surviving a merger is no easy feat. An advisor looking down this path should start by identifying the traits they would be looking for in an ideal partner (and ask the same questions of themselves):
- Both partners should need a merger, not merely want a merger. It’s too consequential a step without full commitment to ‘forever’.
- Both sides need to have similar visions for their futures – if one firm wants to be a values-driven boutique but another wants to ultimately be purchased, that may not be a good fit.
- Business models need to be similar. Dimensions to consider are approach to financial planning, investment philosophy, service models, fees, affiliation. Some differences can be overcome but others cannot.
- Client complexion – advisors often work with niches such as women, ultra-high net-worth, the LGBTQ community or farmers A merger of dissimilar client groups could make it more difficult to create a firm brand or identity.
- Practice characteristics: size, geography, culture and affiliation models should be aligned or at least be complementary.
- Finally, can the two perspective partners get along – is there humility, willingness to collaborate, delegate, accept change and loss of control? What are the partners like on their worst day, etc.?
Today’s million-dollar independent advisor will soon be engaged in a man versus machine faceoff with tech-savvy giants. IBM’s Deep Blue inevitably defeated chess champion Gary Kasparov. Advisors who don’t grow through collaboration will have trouble competing in the future or will concede to acquisition.
Nathan Munits, CRPC®, AIF®, is the president of Longwave Financial, an NYC-based Registered Investment Advisor. His thought leadership on the topic of succession for financial advisors is a result of having engaged in multiple transactions. In articles about M&A, he shares his insights and real-life key learnings about the most significant transaction of a financial advisor’s career – being either the buyer or seller of a practice. Nathan holds the CRPC® designation awarded by the College for Financial Planning, is an Accredited Investment Fiduciary® designee, and holds a BA in economics and philosophy from Queens College.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.