More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
I don’t need to tell you that mergers and acquisitions have played a big part in the RIA business over the past few years. The numbers certainly don’t lie: Schwab Advisor Services reported 109 M&A deals involving RIAs for 2010 in its annual report, and though down in 2011, there were still 57 RIA-related M&A deals, accounting for nearly $44 billion. Read more about trends in the article on Advisor One.
When Richard Stone and I merged our two firms and created Private Ocean in 2009, we both had the same goal: serving our clients with the personal service you get from a smaller firm, but with the power and discipline of a larger firm. Combining resources also meant I didn’t need to hire a separate Chief Investment Officer, Chief Operation Officer or someone to lead compliance efforts, and merging with Salient Wealth Management helped preserve my long-term vision for growth and business continuity.
Now that might sound like a happy ending, but let me tell you, going from seven to 25 people in an office with two sizable groups of diverse clients overnight isn’t a walk in the park. Change never comes without some resistance, no matter how beneficial the outcome may seem, and that’s why I can’t stress enough how critical it is to do your due diligence when you’re considering a merger or acquisition.
I’m not talking number-crunching or matching up lines on paper; believe it or not, that’s the easy part. I’m talking about blending cultures, philosophies, goals and all that other intangible stuff that probably got you started in this business in the first place.
One of the questions I get asked the most is “How did you know that merging was the right choice for you?” I find that I always seem to answer with a handful of questions, which in retrospect served to help me make a decision that best suited my firm.
So I recommend that before considering a merger, ask yourself these five questions:
1) Why are you doing this?
Is this a short-term or long-term solution and does your end goal match up with what the other firm hopes to achieve? What
If you are the sole owner of your firm, consider how you’d feel about suddenly sharing ownership of the firm or even becoming a minority owner. How would sharing or conceding control of decision making affect you?
2) How rooted are you to your philosophical beliefs?
Does the other firm share your beliefs about how you approach client services, your values and your priorities? You can’t overlook the other firm’s motivation.
3) Who are those people anyway?
You can’t know your potential partners well enough so take your time and get to know them. Hold meetings, invite them to play golf, have dinner, employ a coach, whatever it takes to get acquainted. But be realistic. At Private Ocean, we recognize that getting to know each other is still an ongoing process two years after our merger. It’s been a change in culture for everyone and a lot of hard work as we continue to mesh the two firms. But that initial effort to get to know each other was critical to our success.
4) What’s the impact on your clients?
How will your clients react to this change? How will the other firm’s clients react? It’s not too early to start thinking about how you would communicate the merger to clients of both firms.
In our firm, there were many positive influences for the clients as a result of the merger: they were gaining resources that separately two firms were not able to provide. The reaction we received from our clients ran the full spectrum , everything from support and enthusiasm to concern about how the change would impact them directly.
5) How do you plan to foster a positive culture from two different firms?
How well do you know your firm’s culture? When we were considering our merger, Richard and I were deliberate about creating something new and original that represented the new firm as a whole. The goal was not to linger in the past or think of each firm separately, and this has been a key to our success.
There’s plenty in the news latterly about advisor M&A, whether the goal is to create liquidity, cross-sell services, plan for succession or to stay competitive in this ever-changing market. If you’re considering a merger or acquisition, don’t forget to put aside your high-level objectives and dig underneath to the stuff that matters just as much as checking off a list of legalities. And take your TIME!