From the March 2015 issue of Research Magazine • Subscribe!

How to Take Over a $1 Billion Practice

The anatomy of a high-stakes Morgan Stanley practice acquisition

Photography by Jonah Light Photography by Jonah Light

Financial advisor Scott F. Mahoney, 47, ran into a wonderful way to fund a cushy retirement for wife Pamela and himself about 20 years from now: He took over a fellow FA's $1 billion practice. Their firm, Morgan Stanley, amicably financed the deal.

Not that the 23-year advisor, already heading the five-person Mahoney Team in New Jersey, was worried about outliving his money. Managing assets of $350 million, he was doing well. But when Larry Palmer, his colleague and friend in California, a top advisor to ultra-high-net-worth clients, made him an offer, he just couldn't refuse.

The lucrative arrangement was paid for by Morgan Stanley, where the Los Angeles-based Palmer and Morristown-based Mahoney have been employed now for 20 and 10 years, respectively, both starting with predecessor firm Smith Barney.

After more than three decades as a wirehouse advisor, bachelor Palmer, a Type-A highly successful FA named by Barron's in 2011 one of America's top 1,000 advisors, decided four years ago at age 50 to wind up his career in five years and segue to the next adventure.

Mahoney, 47, married for 26 years to his high school sweetheart and with three young children, wasn't even looking to buy a practice to grow his business, which was thriving. But Palmer was giving him the tantalizing chance to add more than 100 super-wealthy clients to his book and expand nationwide.

“I would have been fine without taking on Larry's practice, but this is a great challenge and exciting opportunity to totally secure my family's financial future forever. Over the next 20 years, I’ll pretty much double my income; but I don't need to spend that [additional] money. So I’m going to put it in an account, and that will be the money my wife and I can enjoy during our golden years,” says Mahoney, a self-described “think-it-out, stay-up-late planner” kind of guy. He was reared in modest circumstances in Ringwood, New Jersey.

Nowadays, practice acquisitions are commonplace, especially at wirehouses, which of course have a vested interest in transitioning a retiring advisor's client assets to another of the firm's FAs in order to retain the accounts. To this end, the large firms have implemented structured programs for funding such transactions.

“The wirehouse channel is the least challenged in terms of retaining client assets during the succession of a practice because they’ve proven to be very effective at tying [advisors] up in handcuffs. They have formulas and strategies where a [successor] advisor pays out a certain amount of revenue and the [exiting] advisor can walk out with some money,” says James Poer, president of NFP Advisor Services Group, a large independent BD and RIA based in Austin, Texas.

Last year, 100-plus FAs signed up for Morgan Stanley's Former Advisor Program (FAP), in place now for more than a decade. The most successful transitions are between FAs who previously partnered together. For solo advisors, the firm maintains a proprietary website where they can search for candidates with whom to participate in the program.

In the wirehouse space, on average “every 10 FAs … are responsible for 5.9 acquisitions,” a substantially higher amount than in the RIA channel, where “10 advisors can count only 2.6 acquisitions among them,” according to a July 2014 report, “Alpha Acquisition: Maximizing the Return on Your Practice Investment,” from Aite Group and NFP Advisor Services. FAs at wirehourses and large regional BDs, this research shows, account for 40% of takeovers, split evenly between the two segments.

Morgan Stanley doesn't term practice acquisitions “buy-sell transactions.” Rather, says Barry Goldstein, managing director/COO for field management at Morgan Stanley Wealth Management, “it is a retirement program and transition of the retiring financial advisor's book to the successor advisor.”

The level of FAP takers has been flat for the last few years but now is likely on the increase because of 2014's enticing enhancement to the program: a “Platinum” deal featuring a large upfront payment to the departing FA. Qualifying for this primo option requires a minimum length of service and high revenue thresholds.

Because the upfront money is paid before the advisor's book is transitioned, Platinum, Goldstein notes, poses a financial risk to the firm, unlike its four other FAP options.

Palmer and Mahoney are the first advisors to secure a Platinum agreement, which provides payment of 50% of the retiring FA's trailing 12-months’ gross revenue at the time of signing. Further, the agreement calls for a split, negotiated by the FAs, in which five years’ future revenue is paid out to the advisor who's retiring: In the Mahoney takeover, Palmer will receive 70% in the first year. The exiting FA's portion gradually decreases to zero over the five years. MS's other FAP options provide for a revenue-split only.

This particular deal finalizes in May 2016; but in a soft close, Mahoney already is running Palmer's LA office and team of eight. Palmer, still serving clients, comes in three and a half days a week. For now, the practice is dubbed The Mahoney/Palmer Team.

East Meets West

Their deal is unusual, for one, because the combined practice, now with $1.3 billion under management, is bicoastal and will remain so even after Palmer leaves: Mahoney, keeping his New Jersey office and team intact, will travel to LA for a week or more monthly. Operations teams are maintained on both coasts. Two employees in MS's Denver office are also part of the package.

“Through this merger, we’re creating a national footprint,” says Santa Monica, California, native Palmer, 54. He began in the industry as a 21-year-old intern at E.F. Hutton, then went to Kidder Peabody before joining Smith Barney. Act II for the Ironman Triathlon finisher will focus on volunteer coaching high school football and business consulting—but not for Wall Street.

“I love the financial services industry,” Palmer says, “But I don't want to work as a financial advisor in the current environment. I did a great job, and now it's time to go. I did everything I wanted to do on Wall Street. I thought that the best thing I could do for my clients was to find them someone younger with more passion than I have and who wants to take them to the next level.”

Another atypical aspect of Palmer's retirement is that, in a post that Morgan Stanley created especially for him, the FA has become managing director-senior advisor to field management, counseling the firm's leadership about major FA and client initiatives. Palmer has already taken up these duties, for which he is compensated separately. He says he will remain in the position “as long as the firm needs” him.

As for New Jerseyan Mahoney—who began at Prudential and was with Merrill Lynch right before moving to Smith Barney—he's getting the hang of battling LA's traffic and sprawl.

“In New Jersey, I drive to six meetings a day; in LA, I can get to only three,” he laments, now having worked in MS's Downtown South Flower Street office for several weeks over five months. He has adjusted far faster to the casual Southern California business dress code of sports jacket and slacks, replacing his customary East Coast suit and tie.

The Palmer-Mahoney transition seems ideal because of strong similarities between the two FAs’ holistic wealth management practices: Both focus on large liquidity events of mid-market entrepreneurs who are selling their businesses, and those of stock-divesting corner-office executives.

“Most of our clients had wealth before we met them, but it wasn't spendable,” Mahoney says. “Now, all of a sudden, it's spendable; and that's where we come in.”

Thus far, no clients have left. As for the perennial issue of whose clients are they anyway: Mahoney says, diplomatically: “We’re employees of Morgan Stanley, and they’re clients of Morgan Stanley. But they look at Larry and me as their advisors, and we work for them.”

Though Palmer's practice is jumbo, it used to be even larger. For example, in 2008 The Palmer Team totaled 12 and managed assets of $2 billion. That included Palmer's running money as a stock plan director, for which business he had four employees in Denver. But the stock services arena for public companies had begun to change, he says; and he no longer wanted to devote as much time to it.

That's when he decided to rebrand himself and concentrate 100% on helping entrepreneurs who were experiencing life-changing liquidity events. Even so, Palmer's stock planning AUM totaled as much as $400 million–$500 million when he and Mahoney cut their deal.

In zeroing in on wealth management, Palmer says, “I wanted to do entrepreneurs’ pre-liquidity and post-investment management to help make them legally and financially bulletproof.”

Though the elder FA's decision to quit financial advisory coincides chronologically with the global financial meltdown, he insists the crisis didn't trigger his wanting out; even so, he says “I didn't sleep through the night for two years” so worried was the advisor about clients’ accounts.

Hidden Test

Palmer and Mahoney had developed a professional and personal friendship in the course of co-chairing, for five years, MS's Financial Advisor Council of top FAs, who give guidance about initiatives to senior management. At meetings in New York City, Palmer observed Mahoney in action.

“I got to see Scott in a lot of interesting situations—like the financial crisis and when Smith Barney and Morgan Stanley were merging. I saw how he interacted with senior management—he was measured, intelligent, articulate and well respected. I thought: This is the right person to consider to take over my practice,” Palmer recalls.

Unbeknownst to Mahoney, Palmer auditioned him. “I had an opportunity to meet with a private equity firm in New York that was buying a number of companies, and I asked Scott to cover it since I was in LA,” recalls Palmer, noted for forging such strategic partnerships with other advisors. Mahoney had no inkling this was a test.

“Fast-forward: We have about $100 million of assets from that relationship that Scott has been managing with my team for about six years now,” Palmer says.

The try-out clinched it for Palmer: “There was no other candidate,” he says. “From a philosophical perspective and client practice standpoint, Scott and I are very, very similar.”

The younger FA was “blown away” by Palmer's offer. “I had to pinch myself,” he says.

He also had to think hard about the impact that acquiring a practice 3,000 miles from New Jersey would have on his family. After a series of in-depth discussions, the decision was: Go for it.

“This was an exciting opportunity, a great way to meet and serve a lot of very nice families,” Mahoney says. Not least, it was a great way too to ensure that he and wife Pamela would be sitting pretty in retirement.

The two advisors met with Morgan Stanley management in New York “to discuss the pros and cons,” Mahoney recalls.

In short order, they each signed separate agreements with the firm, then negotiated the five-year gross revenue-sharing provision, which goes into effect on June 1, 2016. Come May of next year, Palmer turns in his Series 7 license—a FINRA requirement—and Mahoney officially takes over the practice.

He minimizes how that change will go down with clients.

“All the account numbers are the same, our phone number is the same, the analyst is the same. The change for clients,” Mahoney half-jokes, “is that I’m ‘the new Larry Palmer’.”

One other change is afoot. Mahoney built his book—which includes long-time clients in New York and California—on portfolio management with full discretion, for which he charges a flat fee. Palmer's compensation is a combination of fee-based and transactions. Mahoney hopes to encourage clients to gradually opt for portfolio management.

“I need to create scale, and my [NJ practice] clients have had tremendous success with the strategies I use. That's my expertise. It's in my blood,” says Mahoney, who has already begun to manage money for several Palmer clients. After the trial run, they have the option to switch back to their previous arrangement.

Here's Mahoney's advice to FAs thinking about acquiring a practice: “The most important thing is to put aside the money for a moment and focus on the clients you’re going to serve and giving them the opportunity to have an uptick in some of the things they’re invested in with their current advisor.”

This coincides with super-advisor Palmer's thinking. He had one overriding concern in choosing a successor: “To know they would do a better job than I did in taking care of my clients and my team. And I saw that in Scott.”

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