From the April 2014 issue of Investment Advisor • Subscribe!

Beating Post-Merger Blues: What Marriage Can Teach Advisors

Integrating advisory firms after a merger often brings more challenges than the merger itself

Successfully merging your firm with another requires just as much perspiration as the negotiations. Successfully merging your firm with another requires just as much perspiration as the negotiations.

On a recent trip to London, my loquacious taxi driver revealed that he and his wife had just celebrated their 50th wedding anniversary. I couldn't help but ask him the secret to his long marriage. He replied, “We’ve only had one argument. Mind you, that argument has lasted 50 years, but we’ve only had one argument.”

What is the secret to success for advisory firms that decide to take the plunge? After all, a merger resembles a marriage of sorts, with many of the same challenges and few of the same benefits. Similar to partners in an ill-conceived marriage, many advisors expend more energy on the wedding than on the long-term relationship.

In contemplating the metaphor of a merger as a marriage, I searched the Internet for “keys to happy marriage.” A website called AmazingFacts.org offers several tips that fit our discussion of advisors combining practices. For example:

  • Continue your courtship. Successful marriages do not just happen, they must be nurtured.

  • Guard your thoughts; don't let your senses trap you. Uncontrolled thoughts have the same consequence as a car parked on a hill in neutral. Something will probably happen—resulting in an out-of-control disaster.

  • Never go to sleep angry. Holding onto resentments and grievances creates an unhappy and volatile work environment.

  • Remember that criticism and nagging destroy love. Don't expect perfection, or bitterness will result.

  • Be clean, modest, orderly and dutiful. Laziness, arrogance, disorder and slovenliness break down trust and respect between parties.

  • Be reasonable in money matters. Showing confidence in your partner's managing ability usually makes him or her more businesslike.

In other words, the article suggests that maintaining a keen interest in your partner, practicing respect and trust, and resolving disputes calmly all build a stronger union. Sounds like common sense—but how do advisors of merging practices approach the same challenges?

In my observation, mergers require purposeful cultivation in order to thrive. The design, implementation and continued development of a shared strategy will yield a healthy and productive firm, but it generally takes about three years for a good merger to stabilize.

When two firms merge, cultures collide. Sometimes challenges arise over firm values, but often the individual entrepreneurs create friction by competing for relevance and power. Before emotion takes root—and before the agreement to merge is signed—both parties should agree on what kind of firm they want to create together. It's helpful to develop a statement of cultural values that addresses your relationship to each other, to employees, to clients, to your community and to your vendors. Include clear and reasonable expectations about what success will look like in this combination, and begin to spell out the roles and responsibilities of each partner.

Successful mergers depend on new partners getting along and communicating in a civil and businesslike way. Coming together requires sustained effort. Partners must resist forming polarized camps, as that dynamic will undermine the original vision of a bigger, better, stronger firm. Remember, the effort around integration requires as much perspiration as the negotiations.

In 2006, I wrote a book published by Bloomberg Press entitled “How to Value, Buy or Sell a Financial Advisory Practice” based on my work with hundreds of advisors who were engaged in a multitude of internal and external transactions. I recently revisited my findings to assess whether much has changed in light of the uptick in advisor-to-advisor sales we are starting to see. The distinctions between successful mergers and struggling combinations still hold true today.

Five key factors jump out in the most successful mergers:

  • The new partners agreed on strategy and developed a unified positioning statement.

  • They quickly moved to adapt their business structure to support their strategy.

  • They aligned their human capital plan, especially compensation, to avoid a pay equity problem between employees of both firms.

  • They harmonized their pricing to be consistent in their offering, including with existing clients.

  • They identified the disconnects in their culture and worked toward reinforcing the behaviors that they desire from employees and partners.

These seem like common-sense suggestions—but experience shows the difficulty in removing ego and emotion from the merger experience. In the end, a dominant culture and a dominant way of doing things usually emerge, even when both parties entered into the discussion as equals. As a result, one party often feels that they are part of a sale rather than a merger. The ensuing emotions fall somewhere between a father's feelings at giving a cherished daughter away in marriage … and giving her up for adoption.

Think of a merger as a marriage between equals. Assuming the parties follow the initial attraction with respect, self-control and honesty, the decisions around integration should come easier.

Start with strategy and positioning: A strategic plan capitalizes on the strengths and qualities that differentiate the newly combined firm from the competition. The strategy should define the level of success and expertise you want your business to achieve. First, agree on which clients you will serve and why, as this will inform which products and services you offer to the market. A strategic roadmap provides a solid framework for making future decisions that advance the business and a touchstone for resolving any conflicts that may arise.

Once the strategy is clear, outline the structure of the future business. If you choose to focus on the retirement plan market, for example, clarify your processes for procuring new business, servicing existing relationships, taking deposits, communicating with plan participants and managing investments. Select technology that is most relevant to your business model, and outline your work flow. With these elements in place, you can create metrics to help evaluate how effectively you are serving clients and how efficiently you are managing your business. After all, a merger is supposed to result in greater leverage and synergy—and that only occurs when partners agree on the structure.

The strategy and structure also inform your human capital plan, particularly around the talent you need, how you define excellent performance, what skills you require and how you compensate employees. Going from a smaller practice to a larger enterprise requires discipline around career paths, promotions, responsibilities and accountability. Many small firms have loose guidelines for compensation, often basing pay on loyalty, seniority or how the year went. As more people become involved in the business, it is critical that they are treated fairly. This requires careful development of base salaries, as well as well-articulated procedures for awarding bonuses and conferring responsibilities.

Next, define the firm's pricing model: Disparity in pricing is a common sign of a failed merger. Similar services call for similar proposals to the client. While it is difficult to change cold turkey, partners should plan to standardize the offer and the pricing of services as much as possible. Be careful not to have advisors proposing the same approach to the same type of client with different pricing. Also, try to avoid “grandfathering” too many clients into an old pricing scheme. It may take a couple of years to get every client at parity, but that should be the goal. Any exceptions must have good reasons, such as the client is your mother or a key center of influence. The pricing discussion has an added benefit of forcing partners to analyze cost, market and value, a discipline that will help the business grow.

[Who should get special benefits and how can you protect your firm from would-be moochers?]

Reasons related to economics, regulation, talent and growth are forcing more and more firms to consider a merger as a natural next step in their evolution. Just as in a marriage, the easy part is agreeing to the union. The difficult part involves executing on an integration strategy with patience, wisdom, respect and discipline.

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