The Tripping Point

In Malcolm Gladwell’s best-selling book, The Tipping Point (Little, Brown and Company, 2000), he explores the phenomenon of “social epidemics,” those wild, raging trends which are triggered by a series of interconnected events. Pok?mon, the South Beach Diet, and American Idol, are just a few of the most recent. Suddenly, and for many of us inexplicably, these epidemics grab the public’s attention, becoming wildly popular, financially successful, and an undeniable part of our culture.

Social epidemics can also take place in smaller cultures as well, even in the financial planning community. In fact, it seems to me that we are on the verge of just such a phenomenon in the realm of advisory practice sales.

We’re Not Immune

Evidence that such an epidemic is emerging in our own back yard is widespread. Consider the following:

• Last year, Schwab Institutional introduced its new practice transitions initiative (disclosure time: with my help), conducted a series of workshops throughout the country, and dedicated a staff to manage the process of listing practices for sale on their web site.
• Fidelity Registered Investment Advisor Group responded with its own program earlier this year.
• At a recent conference for elite advisors sponsored by JP Morgan, four speakers (myself included) addressed issues related to the inevitable consolidation of practices.
• Led by chairman and CEO Jessica Bibliowicz, National Financial Partners, the most successful consolidator yet of financial planning and other advisory practices, had a very successful IPO that was, until recently, also well supported in the aftermarket.
• There have been multiple announcements of banks in the hunt for or having consummated transactions with advisory practices.
• Berkshire Capital, which is one of the most widely recognized investment bankers for the securities industry, has been moving downstream into the mid-side wealth management market and is now appearing regularly at independent advisory conferences.
• New roll-up firms are appearing on the scene, or are rumored to be on the scene already (this, by the way, could be a technical indicator of what’s happening in the market, since the last time we saw these numbers of buyers was before the Millennium Market Crash).

Rumors and Truth

The strongest indicator that something big is in the air is the frequency with which some of the biggest names in the profession are rumored to be either buyers or sellers of practices these days. For example, one such big name–Ric Edelman–announced May 10 that he had sold his Fairfax, Virginia-based Edelman Financial Center practice for about $128 million to Sanders Morris Harris Group, the Houston-based financial services firm founded by the former head of Prudential Bache and E.F. Hutton, George Ball. What’s more, some of these rumors have even turned out to be true. Our investment banking group at Moss Adams is currently working on four prospective transactions involving wealth management firms. On average we receive about three calls a week from advisors who have been approached, and so are seeking advice about what to do.

I see at least two driving forces that could trigger a social epidemic in the advisory world. First, practice economics–which currently encourage advisors to leverage themselves with professional associates and a cadre of support staff–creates a powerful case for consolidating firms and gaining economies of scale. Second, advisors nearing retirement age fear missing an opportunity to substantially boost their nest eggs.

While both are certainly compelling motivations for considering a sale or merger of a practice, I’m becoming increasingly concerned that owners of wealth management and investment advisory firms will let emotion rather than logic rule their decisions. Naturally, all of this activity is stirring up considerable excitement, and not a small amount of anxiety as well. The question in my mind is whether advisors who are being approached are asking the right questions themselves.

Almost without exception, the first question we are likely to hear from an advisor is “What’s my practice worth?” While that’s a good question, and ultimately, the right question, it is usually the wrong one to ask first. When emotion comes into play, however, it’s the one that is top of mind for most folks. Of course, it’s a difficult question to answer, even when it’s asked at the appropriate time, because each firm is unique and has its own value drivers, and each buyer has his own motivations for mergers or acquisitions that may affect the price and terms it offers. So to reach an accurate answer often entails considerable research.

Step Back a Moment

More importantly, though, advisors need to step away from the precipice for a moment, to focus on their own situation, and then that of any prospective buyers, and ask more relevant questions than “what’s the value.” Here are some things you might consider: If you sell to a particular buyer, will they want you to stay? If they want you to stay, for how long, in what role and for how much additional pay? What will you get in terms of future compensation and future opportunities? Will the sale allow you to focus on your unique abilities and interests or will it force you to function in a role you won’t enjoy (i.e. managing and growing a bigger business)?

And if they don’t want you to stay, what will you do? How much money do you want and/or need from the sale? Is the timing right in light of where you are in your career? What is your motivation for making the sale? Liquidity? To take some chips off the table? Boredom? Burnout?