An Unromanticized Guide to Merging Advisory Firms

Succession planning, like one’s mortality, is something advisors are often reluctant to think about.

But just as your clients need to get their affairs in order in case untimely but far-reaching events affect the lives of their loved ones, so too must advisors have a succession plan in place — for solid business reasons in addition to mere contingency planning.

That message was brought home, poignantly, by Michelle Barbiere of Placemark Investments, who told an audience of investment advisors at the MarketCounsel conference how an advisor she worked with a decade ago suddenly contracted West Nile virus.

Speaking at a wide-ranging session devoted to succession planning, Barbiere said the advisor — in the prime of life, with a wife and young children — was put into an induced coma. When the 43-year-old came out, he was paralyzed. Other practitioners at the firm were, fortunately in this case, in place to make decisions and serve clients during this period. Unfortunately, the advisor died shortly thereafter.

In the ensuing period, the lack of clear planning made sale of the business a challenge. The moral of Barbiere’s story was that advisors need to plan for all eventualities not only for their clients but for their business: Sole practitioners particularly must put in place and test mundane matters such as billing authorization and check-writing authorization.

But there are other surprising lessons that emerged from the panel discussion at the Las Vegas conference.

One is that a business involved with investing a person’s life savings is not likely to experience significant growth absent an understanding that the business itself has a future beyond the life of the practitioner.

That point was brought home by Greg Friedman of Private Ocean, the firm which resulted from a merger of two predecessor firms, Friedman & Associates and Salient Wealth Management.

Friedman expressed surprise that the dazzling boutique they thought they put together wasn’t getting referrals, even from their best clients, for two years after the merger.

“‘We don’t know what we’re referring people into,’ clients would say. “‘We want to see what’s going to be. Are you staying?’”

It wasn’t before the third year that those doubts dissipated and the referrals started coming in.

While getting on that organic growth trajectory may sound appealing — Private Ocean just passed $850 million in assets under management and brings in $7 million in annual revenue — Friedman did not romanticize advisory practice mergers.

“It was the hardest thing we’ve done in our lives,” Friedman said, adding that the consultant advisors most “need to help you on this is a therapist or psychiatrist.”

Waxing poetic, Friedman told the assembled advisors that “your business is like a tree and all those leaves represent clients. Leaves have various strengths [as to] how tightly they’re attached. A merger is like taking the bottom of the tree and shaking it,” he said, while violently shaking his hands to underscore the point.

Other difficulties included profitability, deal structure and turnover.

“It takes longer [to be profitable] than anything you think it’s gonna take,” he said; it took three years in his case.