Bank on It?

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.”