Last month, I wrote about Mark Hurley’s newly released third (and in my view, best) white paper on the future of the independent advisory industry: “The Brave New World of Wealth Management.” The paper is a “‘30,000 foot view’ of the current state of the industry and, given the forces confronting the industry today, how we expect the structure and the economics of the business to evolve over the next decade.”
Having spent the past five years evaluating hundreds of independent firms as CEO of Fiduciary Network LLC, a private banking enterprise he launched in 2007 that provides succession liquidity to independent firms, Hurley and his team have gained unique and invaluable insights into the advisory business. For this paper, they reviewed data about past transactions and talked to many of the participants in those deals, as well as a host of industry experts and observers of these transitions.
As I wrote last month, there’s too much insightful and useful information in Hurley’s 84-page study to report on in these pages, so my last column focused on Hurley’s assessment of the present state of the advisory industry and its implications for the future of independent advice. Equally interesting—and probably more useful—is the Fiduciary Network team’s evaluation of the current state of the transactions between buyers and sellers of advisory firms, and their suggestions for conducting these deals more successfully. As the baby boom generation of owner-advisors shifts into high-gear about selling their firms—internally or externally—they’ll be well-advised to study Hurley’s insightful analysis of what has worked, what hasn’t and why.
Hurley’s section on mergers and acquisitions starts out with a rather pessimistic (and colorful) assessment of advisory firm M&A: “Notwithstanding the compelling economics of acquisitions within the wealth management industry, we are expecting to see a relatively limited number of transactions because of the inexperience of firm owners with M&A transactions. When two extremely inexperienced parties try to merge together, the process is somewhat analogous to virgin porcupines trying to mate—there are more than a few obstacles and risks in the way of a successful outcome.”
The M&A activity that Hurley addresses in the paper is between what he calls “evolving businesses,” which are firms that manage more than $1 billion in client assets, and so called “tweeners,” which are firms with between $2 million or so and $1 billion in annual revenue. However, his analysis of the current business climate for acquisitions and the challenges involved can be applied to the transitions of firms of all sizes, and even to internal succession.
First, he addresses the pervasive problem of the quality of the existing client firms in many of today’s boomer-owned firms: “One factor limiting the number of transactions is that many tweener firms—the most obvious acquisition candidates for evolving businesses—have unattractive client bases due to either or both concentration risk (the revenue of many tweeners is dominated by a handful of client relationships) or demographics (many tweener client bases tend to be quite old).”
As any good M&A consultant will tell you, the value of any independent advisory firm is largely dependent on the value of its current client base, which includes both its overall age and how quickly it’s depleting its AUM. Hurley then addresses the big issue in any advisory transition: “Wealth management deals are premised (and valued) on the ability to transition to the buyer the goodwill built up over many years between the seller and its clients. In other words, all of the value is contained within the very human relationship between the seller and its clients. Consequently, psychology—navigating human preferences, emotions and biases—becomes far more important than economics in successfully consummating a deal.”