The advisory world has witnessed a great deal of mergers and acquisitions (M&A) activity in the past few years, leaving many advisors not only wondering what the future might hold for them and their investment practices, but also how they can best manage their businesses to benefit from the trend.
An analysis of this M&A trend shows that buyers aren’t just looking to grow or penetrate new markets. Instead, many large RIA firms are looking at mergers and acquisitions as a substitute for their organic growth strategies. On the other hand, for smaller firms, merging is more of a defensive strategy by which advisors and professionals from different firms join forces in the hopes that newfound synergies and cost savings will allow them to compete with larger entities.
Principals are increasingly taking measures to position their firms for a possible sale or merger. Ten percent of the principals surveyed in the 2005 AdvisorBenchmarking study cited the purchase of another practice as their top goal (up from 5% in 2003), while the percentage of RIAs who positioned their practice for purchase shot up to 30% from 20% in 2003.
Let’s take a closer look at the profiles of the advisors whose goal is to position their practice for sale, as shown in table 1 below.
Financial Profile of Firms Positioning Practice for Sale
|Median number of employees||
|Median assets under management||
|Median number of clients||
|Median growth rate||
Again, firms that find the idea of merging most appealing tend to be much smaller in size, as they are less likely to hold their own against the growing competition in the marketplace.
Despite an increase in the time spent managing portfolios and dealing with compliance (see PracticeEdge, August 2005), succession planning is an often ignored issue that investment advisors face. Just 34% of financial advisors overall have developed succession plans for their firms, down from 37% the year before.
What’s the plan?