From the September 2008 issue of Wealth Manager Web • Subscribe!

M&A: The Future of Wealth Management?

Ask any RIA or wealth management firm what tops their hit list. Five, ten years ago, the answer probably would have been more assets, more fees, more clients, more professionalism, or some combination. Ask today and the answer may well be to buy--or to be acquired by--another firm.

In the wealth management business, transition and succession planning has moved front and center in many boardroom discussions. To properly navigate these shoals, you need a blueprint to sustain your growing business, manage your growing staff, and prepare for management succession and ultimate exiting. Indeed, prudent succession planning should not be just an event but a process of five years or more.

Who are the sellers and buyers today? When should firms start thinking about transition and succession planning? Should you merge, partner, sell, or keep the company? For answers to these and other relevant questions, Wealth Manager asked veteran financial writer Bruce W. Fraser to moderate a discussion with five experts.

WM: Mark, can you give us a state of the state with regards to the RIA and wealth management industries. For starters, what's driving growth and M&A activity today?

Tibergien: It's becoming more of a balanced market. It has been a seller's market just because there have been few buyers, but circumstances are changing. The other factor driving it is some advisors have deferred the decision to sell over the last five years because the market has been giving them a lift. Those may be more compelled to consider an offer at this point.

WM: How has the entry of 78 million baby boomers affected the market today?

Tibergien: Good and bad. There's liquidity events that come with baby boomers, but there's also a feeling out there that when the last baby boomer dies the world will stop. The reality is there are still economic growth engines allowing people to accumulate funds at all levels. What's happening is there's an over supply of people who need advice and not enough of a supply of those who render it. So that makes the business appealing to those who clearly think it's a prudent business to be in as long as it's managed and staffed right, and you have integrity in your approach. It's never a challenge to find such a business, just to manage it correctly.

WM: Who are the sellers and who are the buyers today?

Lally: We are seeing three types of sellers in the marketplace. Mark touched on one, the aging generation of financial advisors who have reached a point in the life cycle of their business where they are thinking about creating a monetization event. However, in addition to any financial gains, most financial advisors want to create a stable home for their client base going forward, as well as their advisors and staff.

There's also the firm that wants growth in their business, but may not have either the capital or the infrastructure to do so. These firms may look to sell or merge with a larger organization that provides additional back-office and marketing support and capital, as well as growth capital.

Gladstone is also being approached by the seller who now realizes they may be a better financial advisor than an entrepreneur. Their objective is to focus on their core expertise, which is providing financial advice to clients. They may want to create a monetization event to capture the value for the practice they've built, and then give themselves the ability to continue and grow their platform. All these groups look to perpetuate their legacies.

Diamond: As a search firm, we move people already independent and looking to sell their practice and either consolidate or aggregate a firm, or sell it on the open market to another RIA or independent. Another category of seller we're seeing may not necessarily want to sell to a consolidator or another independent RIA, but may want to return to a traditional brokerage firm and be less independent. They realize what they like best are to manage money, deal with clients, and not put toner in the copy machine.

Lally: There are three categories of buyers. The first is RIAs who have built a stable client base and infrastructure and see another advisory firm as a way of expanding and leveraging their business. The buyers who will be effective are those who have designed and deployed a focused and targeted strategy, as well as securing adequate capital.

Regional banks are another category. Historically, they have relied heavily on deposits and loans for their growth and profitability, which has become a commodity. They may or may not have a retail brokerage arm, but by acquiring a wealth management firm, they can affirmatively answer those wealthy individuals who have assumed these banks have no such services to offer.

The final category is aggregators or consolidators with the strength in the marketplace who have built a brand and can share infrastructure and intellectual capital. A lot of these advisors want to be part of something bigger and realize the usefulness of joining a bigger firm going forward.

WM: When should firms start thinking about transition and succession planning?

Adolf: Transition and succession planning starts with thinking about the objective. Advisors want to first protect their long-term clients, second, their colleagues and employees, and, third, of course, their own economic interest. You cannot start the process too early. With 55 the average age of a principal, as Mark has said, the majority of firms need to think about transition planning and succession planning over a period of years. Probably the best time to start is when the firm is developing a roadmap for future growth. That is the time to think about your internal talent and create opportunities for those stars that can become the next generation partners and serve your clients for years to come..

In a little over two years, Focus has done about 15 deals with firms with an aggregate of over $27 billion in client assets. Before we close the transaction, we make sure there is a transition plan in place. Ultimately, we prefer to plan for transitions that are 10 or 15 years away, but we can also execute on transitions that need to happen sooner.

Tibergien: There's some confusion between ownership transition and the continuity of the enterprise. Regardless of how one gains liquidity and value out of their business, advisors who build their business to last will always be in a position to realize some financial reward. Regarding continuity of the enterprise, several things need to be resolves. One is how will clients be serviced and how will new clients grow? How will the business be managed? How will the next generation of clients be taken care of? At a minimum, this is a five-year process to ensure an orderly transition of the business.

Lally: From an investment banking standpoint, entrepreneurs regard succession planning as an event, not an ongoing process, and need to take the opposite tact. On the sell-side, the seller is focused on succession as it pertains to perpetuation of their legacy post transition, particularly if something should happen to the principal of the buying firm. There's a difference between ownership succession and management succession. For many buyers, succession planning may affect the valuation of the selling firm since they are acquiring not only a book of business but perhaps the staff and expertise, and want to be sure the whole package remains intact should the principal become disabled or die prematurely. Their concern is having a management team in place that knows the process, knows the clients, knows the system, and can perpetuate the acquisition going forward.

WM: Under what circumstances would it be best for owners to merge, partner, sell or keep the company? Or create a merger of equals as many firms are going today?

Tibergien: The biggest challenge for advisory firms going forward is their physical capacity to take on more business. There is a difference between the book of business and the business enterprise. As Mindy mentioned, advisors who are selling have a moral responsibility - it's not a producer's responsibility - to ensure clients are going to be taken care of in the future. So those who plan to bring in new staff, new partners, and others, are really taking that next step, transforming the organization from a book of business to a business enterprise.

Lally: Along with running their daily business, advisors need to integrate strategic thinking into their operation and to continually evaluate their short and long-term options. The reality is when you look to merge some people start to think about a merger with equals. However, it's never a merger with equals because someone is going to have to run the firm. Mergers also go well beyond economics and focus more on a cultural and synergistic fit. We find that personality and cultural analysis is as integral to the success of a merger as the financial analysis. We believe the best sell-side firms are not mature businesses, with mature client bases. The best sellers are on the upward swing in their business growth cycle. They present the best value to a potential suitor.

Adolf: Helping our partner firms accelerate their growth strategies sometimes requires mergers with smaller firms. We increasingly find smaller firms actually reaching out to Focus as they would like to be considered as sub-acquisition candidates for some of our larger firms. Many of these small businesses are doing a terrific job for clients and just never grew or wanted to grow beyond a certain point.

In our universe, we dedicate significant resources to these sub- acquisitions. It's helpful to have the capital to finance them, which typically RIAs don't have, but it's really all about properly structuring the process, the legal side, and integrating the new partners and clients into the practice. This is not a trivial effort.

WM: When and how should you use an investment banking firm?

Lally: Using an investment banking firm is critical for those organizations that want to bring a tactical approach to the process. A true investment banking firm acts as an intermediary, representing the client's best interests in a transaction, and doesn't take sides. Oftentimes, there are a myriad of alternatives and strategies so an experienced investment banking firm can be objective and help provide a tailor-made option or options that best meet a client's situation. The M&A process can be exhausting and frustrating for the principals of a firm to evaluate different strategies as they often don't understand the art and science behind business combinations. We believe in the statement -Don't Go It Alone!

WM: Overall, what is it that makes a firm attractive from an acquirer's point of view?

Adolf: Clearly, there are three important factors for firms like us: Number one is quality, number two is quality, and number three is quality. Ultimately, an acquirer is looking for growth. A firm that is stagnating or not a growth story will not be successful in any kind of transaction.

In looking at quality, basically there are four factors we look at: First, the quality of the client relationships. Who are these clients? How deep are the relationships, and what advice is being rendered? Second is the quality and depth of leadership, looking at their succession plans and what options they have. Third is the processes used in operating the business. Last but not least is the financials, meaning their returns and future outlook.

Tibergien: They key for all sellers is to remember that value is a function of the future. If they have already consumed all the opportunity, the transaction is going to be less appealing to buyers.

Lally: The most attractive seller is the firm on an upward growth swing. It's not the mature business with the mature staff, mature principals and mature client base. Many buyers also look for inefficiencies in the selling business they can leverage or avenues for accelerated growth. However, most entrepreneurs believe that since the business is growing it may be worth more later - this statement is not always true.

WM: What have you observed successful firms doing to prepare for succession?

Adolf: Clearly, it starts with setting the objective. What are they really trying to achieve in this process for each of the individual partners? And then, ultimately, creating a structure that will meet their needs. You would think it would be an insurmountable challenge to meet the needs of all these individuals but we have been successful for some of the largest firms in this industry.

Lally: They make it part of their everyday process in the business, and not another item on their "to do" list. They are emotionally detaching themselves from the business to objectively critique their firm with vision going forward. Successful firms address succession as a dynamic process and will review their succession plan, because businesses change, objectives change, and the economy changes on a regular basis.

WM: Why is the development of human capital so important for succession planning in a potential merger? It's all about staffing, isn't it?

Lally: Successful succession of key positions is largely dependent on ongoing, planned talent development. The succession plan includes individualized coaching, mentoring, experience diversity, and skill set training. Assessing talent is critical not only to determine whether there is a match as to how the two organizations value employees.Diamond: If all financial advisors were sales reps and selling widgets, it would be easier. But because it's a people business, the mandate is to form teams to share responsibilities. Different personalities resonate with clients in different ways. And, by having the right people in place, all members can manage to their strengths. Succession planning should take into account the management makeup of the acquired company. There's the WM who manages the money behind the scenes and the rainmaker who deals with clients. Once the team's senior member looks to step aside, an important consideration for the buyer is who's left behind with an established relationship with clients.

Tibergien: There has to be a continual replenishment of talent to drive the business forward. There is no shortage of clients who need advice; there is a shortage of people to render it. If an advisory firm is not willing to invest in a continuity program, such as training younger advisors, it's like buying a depleted oil well.

Lally: Regarding human capital, too often we see when a financial advisor is looking to bring in or groom a successor they look at the financial background of a successor, and not whether the person has the capabilities to manage, be a leader and a visionary for the firm.

WM: It seems everywhere you turn nowadays former brokers are setting up their own shops. What's driving this? Might there be efficiencies gained from such a broker joining an existing firm? What incentives can wealth management firms offer?

Diamond: We define a breakaway broker as somebody who works for a major brokerage firm and decides he has had enough and wants to go independent. So where it used to be considered sexy to have a Morgan Stanley, Merrill Lynch or UBS on your business card it is now more of a negative or handicap than a positive.

Secondly, all the major firms push proprietary products, change pay plans often. And compliance regulations are established to manage the lowest common denominator. So brokers are jumping through all sorts of hoops and are largely frustrated with a broken model.

The best breakaway brokers have already monetized their business. They've moved from one captive firm to another in the past. They've already taken a big check and don't care about getting another at this stage. They're willing and excited by the idea of going independent. But some don't have the courage or desire to be an entrepreneur. They don't want to put toner in the copy machine. The large broker dealers, RIAs, and consolidators can offer them the opportunity to plug into an existing infrastructure with all the benefits of independence, but with the full support and intellectual capital, the culture and synergy behind them.

In terms of incentives what wealth managers can offer that large brokerage firms can't is the ability to be nimble, flexible, to think outside the box, to do one-offs, to look at the individual situation and mold it accordingly. They also can offer equity in the organization, which is a big incentive. Finally, philosophically, when a breakaway broker joins an existing RIA firm he owns the clients and is no longer a commodity as he was at Merrill Lynch or Morgan Stanley. There's more force than ever to drive those brokers away from major firms to the independent space.

Adolf: Ultimately it will be an avalanche of the best brokers moving to a different model. You can truly do the right things for your clients. For example, every time you do a transaction you don't have to send a signed confirm to your clients that says that your interests are not aligned with theirs. This is the opposite of the fiduciary model Mindy talked about.

As a broker you don't build equity. You have an attractive cash flow, but the head office is taking an enormous bite out of your economics and the ultimate payout is much smaller. As an RIA you are building equity, which can have enormous value when combined with what Mindy said. The really good brokers in this field - the top 1% or 2% -- are concluding the better way to do business is when they and their clients are sitting at the same side of the table. This is the RIA model.

WM: How do you assess the cultural fit between two organizations?

Lang: It begins with assessing each culture. Assessing the organization's culture is a discovery process of interviewing, surveying, and observing the behavior that is modeled and acceptable to each organization. The phrase "the way we do things around here" captures the essence of culture. The discovery process consists of specific interview or written survey questions and responses along with on-site observations. For example, do the two cultures have a similar way of approaching internal communications - transparent and open to all, vs. closed and in the hands of a few at the top; information largely communicated by email vs. face-to-face meetings.

Another culture area key is their philosophy regarding employees: Are the team members, associates, hourly employees respected and valued or tolerated and dispensable? The number of disconnects between cultures negatively impacts the likelihood of an effective merger or acquisition. Conversely, well matched vision, mission and culture, lends itself to a smooth transition. Building awareness of and managing organization cultures, both similarities and differences, is an imperative part of successful mergers, acquisitions and alliances.

Tibergien: The big question is how do people behave when you are not looking. In a nutshell, that's really what defines the culture of an organization. The fact is cultures are created through a combination of nurturing genes and environment, and so we know that every business is going to have something different. Paul referenced this earlier when he said there is no merger of equals and that is true. One culture ends up surviving, becoming the dominant culture. The philosophy and approach to how you deal with clients and how you deal with staff will ultimately define whether or not you are successful.

WM: How do you assist a strong entrepreneurial leader in phasing out?

Lang: When someone becomes an industry "guru" or the go-to decision maker of the firm, it can be both a risk and a challenge. The risk to the firm is having clients with a sense of trust and loyalty centered on the individual leader instead of the firm as a whole. The risk increases as the leader ages and continues to play the role of the one. who should be followed.

The challenge for a strong leader is releasing their personal identify that becomes part of the fabric of many successful firms. Phasing out includes creating a culture where talent is actively sought and developed, projects and decisions are delegated to a diverse executive team, and team members are rewarded and accountable for contributing to the growth of all firm members, not to just meeting a leader's directive. When a leader has been the central figure for many years, it is not only hard for him to release control and shift the way he acts; it is also difficult for team members to take on new roles and responsibilities.

Tibergien: The real issue within advisory firms is that most of them are fundamentally small businesses. Most have an over reliance on the founder or the leaders of the business, and most will require a conscious effort to develop new leaders if they wish to succeed. The faster they can move towards reducing dependency on them, the greater their success.

Lally: Entrepreneurs typically view their business as just one of their children in the family to whom they gave birth and nurtured. As with any child, eventually you have to let go. It just goes back to the original theme that succession planning is not an event but a process, and over time you will have to let go of this child. Hopefully, the spouses they marry will help take them to the next level.

Adolf: With all of our 15 partner firms what is really important from our perspective is that a single person cannot serve clients in the long run. Part and parcel of running a business, of being an RIA, of taking care of your clients, is fulfilling your obligations to your staff members and employees. Entrepreneurial leaders really build a group around them and capabilities where ultimately it is more than just a single person, but really a team working for the benefit of the clients.

Who's Who

Mark Tibergien

CEO of Pershing Advisor Solutions LLC, an affiliate of Pershing LLC (, where he is also a managing director and member of the executive committee. A nationally recognized consultant on management issues within the financial services industry. Prior to joining Pershing, Tibergien was a principal at Moss Adams LLC. He is author of Practice Made Perfect and How to Value, Buy or Sell a Financial Practice.

Paul T. Lally

President and founder of Gladstone Associates, a boutique investment banking firm in Fort Washington, Pa. ( Gladstone provides buy-side advisory, sell-side advisory, business transition planning, and strategic advisory services exclusively to fee-based advisors, RIAs, and broker-dealers.

Rudy Adolf

Founder and CEO of Focus Financial Advisors LLC, a New York-based holding company with 15 independent wealth management firms and $28 billion in client assets. Since early 2006, Focus Financial has invested in 14 RIAs in the U.S. and recently closed an acquisition in the UK.

Mindy Diamond

President and founder of Diamond Consultants, a boutique executive search firm which specializes in the placement of financial advisors and wealth managers. ( Based in the New York metro area, Diamond is a national authority and columnist on recruiting in the financial services field.

Lois Lang, Psy.D

An industrial/organizational consultant at Moss Adams, LLC, an accounting and consulting firm based in Seattle, Wash. ( A senior manager, she provides management services to clients including organizational assessment, culture assessment, management succession and executive coaching.

Bruce W. Fraser

Moderator and freelance financial writer in New York City.

He is writing a book on millionaires (



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