Interested in a risk-free way to increase revenue, profits and assets under management—albeit with lots of hard work? John Arnold of AXA Advisors has found this can be done—repeatedly—through acquiring the advisory practices of retiring advisors affiliated with his broker-dealer.
Indeed, the 36-year-old advisor based in Scottsdale, Ariz., is now negotiating his fourth deal in Tucson, having already acquired two practices in Albuquerque, N.M., and another in Scottsdale.
The opportunity came to Arnold’s attention when he learned from his broker-dealer that it had six advisors in Albuquerque and not one of them was under age 65.
The problem of aging advisors has been made more acute by a shortage of advisors entering the business, Arnold (left) said in an interview with AdvisorOne. He says that as a response to the Madoff scandal, the Financial Industry Regulatory Authority (FINRA) has made it much harder for advisors to pass the Series 66 exam by increasing the number of questions an advisor must correctly answer and by making those questions more difficult.
“So fewer people are entering the business while more people are exiting due to age and retirement,” Arnold says. “That creates a huge business opportunity for people like me.”
The next step was developing a personal connection with some of those retiring advisors, whom he met at AXA’s annual meetings.
“Personal confidence and chemistry is key to the success of this,” Arnold says. “The retiring advisor wants to know who’s taking over, and they want to have confidence in that person.”
Arnold has found that the key consideration for retiring advisors—above even monetizing their books of business—is to know their clients are in good hands. That’s what makes acquiring a book of business a win-win for both seller and buyer.
“Retiring advisors’ main goal is to make sure the clients are taken care of. Driving a hard bargain is not their priority. They’re done. They’ve got [money]. That gives me the leverage. But in a respectful way. I have to add staff; service time is required; there are incremental costs I’ll have to take on my books,” he says.
Having learned that Albuquerque—an hour’s plane ride from Scottsdale—was an underserved market, Arnold made his first acquisition there in 2010, and the move was an immediate success.
“I paid for that within three months. I was able to dig up a really big 401(k) rollover that the previous advisor didn’t know about.
“They [were] in the swan song of their career, so maybe they weren’t as hungry as I and my crew.”
While a rollover is nice bonus, the biggest payoff and the key to Arnold’s acquisition strategy is to try to convert a transactional book of business into fee-based advisory relationships.
“If I can transition these relationships into my advisory practice, that’s all new recurring revenue that I didn’t have to pay for”—since his acquisition price, usually between one and three times annual recurring revenue, is based on stock and A-share mutual fund transactions and the like.
Encouraged by his first success in Albuquerque, Arnold bought his second book of business last year in Scottsdale, then another this year in Albuquerque, which he is still transitioning. He is already realizing economies of scale through merger of the same-city offices.
Despite all the long hours, additional travel and difficulties of hiring and training new staff members, Arnold considers the acquisitions risk-free.