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Bank on It?

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If you’re like most independent advisors, you’ve probably gotten a call from a bank eager to buy your practice. Such inquiries are not surprising, since banks of all sizes continue to search for fee-based revenues. But when should an advisor seriously consider a bank’s offer? And what are the potential rewards, and pitfalls, that accompany such a deal?

Banks are usually tempting partners for advisors who are looking to grow their practices. That was true for Charlene Carter, president of Carter & Carter Financial, a family-owned planning firm that merged with Siuslaw Valley Bank in Eugene, Oregon, last year. With 10 full-time staffers, Carter decided it was more cost effective to align with a bank. And in an environment where clients are more cautious about who’s handling their money, Carter says, the bank’s reputation lends further credence to her firm’s credentials.

While assessing a bank’s reputation is an important step, there are other variables an advisor should consider before signing on the dotted line. Of utmost importance is determining whether the bank and the advisor are compatible. Mark Tibergien, principal in charge of succession planning at Moss Adams LLP in Seattle (and now a regular columnist for Investment Advisor; see page 41) says too many mergers of this nature are “opportunistic, and not based on a vision of the businesses together.” Advisors and banks often fail to assess whether they have complementary philosophies, client bases, and a shared protocol for conducting business, he says. Advisors “must look into the bank’s success with other mergers,” Tibergien says, “especially of non-traditional businesses.” The bank’s management turnover, infrastructure support, reporting lines, and financial strength should also be examined, he says.

In Carter’s case, she had a pretty good idea of Siuslaw’s overall health because not only had she been a customer of the bank for years, she was also good friends with the bank president’s daughter. Carter and her friend had the unique advantage of crafting the deal together, and Carter made sure “everything was spelled out” in the contract. It’s imperative to say “this is the way it’s going to work: you run the bank, and we’ll run the advisory firm,” she says. Bank personnel sit on the planning firm’s board, she says, “but they don’t tell us what to do.” And Carter’s friend helps the bank and the planning firm with integration issues. “It’s a full-time job,” Carter says.

Failure to draw boundaries clearly from the outset usually results in turf battles later on. Consider what happened to Joe Chornyak, principal of Chornyak & Associates, Inc. in Columbus, Ohio. His firm was acquired by First National Bank of Zanesville in April 1999, and the bank subsequently merged with Unizan Financial Corp. last March. Unizan already had a financial planning business that it bought before the merger, and Chornyak says the two planning arms were “philosophically on different pages, so I agreed to acquire my company back” from the bank last June. Chornyak’s experience raises another must-do for advisors when striking a deal: make sure there’s an exit strategy.

In hindsight, Chornyak says he failed to properly assess the two parties’ differences. “It is glaringly apparent to me today that if an advisory firm is going to be acquired by, or align with, a financial institution, they had better be on the same page in terms of who’s going to deliver what products and services so they complement each other rather than compete with each other.” For instance, “often bank trust departments will focus on individual securities, whereas planning organizations focus on the use of mutual funds,” he says. “And the trust departments, in general, do not do holistic financial planning.”

While Carter’s merger with Siuslaw is “definitely going well,” she’s experienced some culture shock, too. The bank management tends to make decisions more slowly than she’d like, and the two differ on how to handle clients’ worries about the market. “Bankers are very pessimistic about the market,” she says. Bank personnel wouldn’t have any qualms about telling clients–or coaxing her to tell clients–”‘we’re going to go to war and things are going to be really bad for a long time.’ You can’t have that attitude when you’re an investment advisor; it just doesn’t work.” She’s telling clients, “You’re a long-term investor and it’s very important that you keep buying more shares while [stocks] are down.”

Since the merger, Carter says her firm’s assets under management have jumped 10%. “We’re thrilled . . . because most firms would tell you they lost 20% or more of their assets to banks,” she says. Bank referrals have helped, she says, but it’s taken some time to build up a steady stream of them. Tibergien says merging entities often mistakenly believe that “once the deal is inked, clients will come rolling in.” Most of Carter’s referrals come from the bank’s outlying branches and tellers. Tibergien says it’s important for the advisor, as seller, to insert language into the agreement detailing the bank’s “contribution to future business.” If the bank fails to create new business for the advisor, he says, “perhaps there is a premium or penalty the bank should pay to the seller for the gap.” As for the bank’s terms, Tibergien says the bank should propose “keeping some equity with the buyer, either in the advisory firm or the bank itself, so that they have a vested interest in the future success” of the merger. “But I would also be inclined to buy a majority interest,” he says, “and would structure [the agreement] so that there is a holdback in the purchase tied to future performance; there’s nothing worse than having the mergee take the check and then lose interest in the business.”

Tibergien says the two parties must also recognize that a merger is a growth strategy, not an exit strategy. And banks, he says, as strategic buyers, tend to overpay for practices, while advisors often get “greedy” when fantasizing about the marriage’s potential. David Grau, principal of Business Transitions (–an online marketplace for advisors, broker/dealers, and CPAs looking to buy or sell their practices–says most of the advisors who are trying to sell their practices through his site are doing so because they’ve failed to “consummate a transaction with a bank” on their own. Most sellers are fee-only advisors between 60 and 70 years old who are looking to retire. “Banks almost always want the seller to stay on and run the [firm] for three to five years,” Grau notes, which is not a good exit strategy for many of those advisors.

Most practitioners listed for sale on Grau’s site are fee-based, he says, “charge commissions, and work under a broker/dealer.” Banks tend to prefer “a real clean, independent RIA model that they could own fully–one that works directly under a regulator, but not under a broker/dealer and a regulator.” Another potential compliance snafu, Tibergien says, is if the advisor is an NASD-licensed broker. “There are some real compliance problems in turning over commissions to the bank unless the bank has a broker/dealer.”

Banks’ interest in acquiring advisory firms will continue to intensify. If you’re an advisor who’s contemplating such a partnership, it pays to weigh all the pros and cons before taking the plunge.