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Practice Management > Succession Planning

Advisor M&A, the Alpha Way

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What separates the best from the rest is of interest in all areas of life, but should be of special concern to financial advisors seeking to monetize the value of the practices to which they have devoted their careers.

And that’s what a new study performed at the behest of NFP Advisor Services aims to do: namely, to tease out the factors that lead to “alpha acquisitions”—acquisitions with which advisors ended up satisfied—and avoid the missteps leading to dissatisfaction.

Based on a survey conducted by the Aite Group this spring of 100 advisors who had made practice acquisitions, which Aite rates at the 90% confidence level, the analysis, which NFP is making available on request, proposes best practices likely to maximize return on their investments.

The importance the subject stems from an aging advisor labor force, some 40% of whom are planning to transition their practices in the coming decade, according to previous research.

But as the report makes clear, the desire for M&A does not obviate the need for careful execution. Witness the botched Daimler-Chrysler merger, which came undone within a decade; or closer to home for advisors, Merrill Lynch’s 2005 acquisition of the Advest Group, of which the Aite whitepaper states:

“Within a short period of time, most advisors from the acquired company had left Merrill Lynch, leaving very little upside from the US$400 million investment.”

The Merrill-Advest experience reinforces the most common challenge acquiring advisors face—client retention, a hurdle that 34% of those surveyed struggle with. Uncertainty about book ownership (28%), repapering existing agreements (27%) and agreeing on the value of the practice (26%) were the next most common challenges.

But while filled with details on advisor M&A such as the challenges noted above or data on which advisor channels are most active in succession efforts, the study’s emphasis is on separating the alpha acquisitions from the non-alpha ones.

To that end, personal contact with clients in transitions is an example of an alpha strategy that generates high retention levels. While 48% of alpha acquisitions involved meeting with the client one or more time, only half as many non-alpha acquisitions (24%) took that approach, with most non-alpha acquiring advisors (70%) preferring to dispatch letters to clients informing them of their new advisor.

Another key factor emphasized by the 31-page report that separates the alpha from the non-alpha acquisitions concerns the speed with which they are carried out.

A majority of advisors experiencing successful transitions (52%) managed to complete the process within a year, while 70% of non-alpha transitions took three years or more to complete.

Here’s where the report is at its most insightful. The study found that 57% of the alpha acquistions retained all of the acquired firm’s staff—a practice just 19% of non-alpha acquisitions undertook. It may be that getting rid of experienced and familiar-to-clients staffers saves money in the short-run but greatly lengthens the process of completing the transition, which—as noted above—is far likelier to succeed if carried out quickly.

Similarly, the study found that 44% of the most successful acquirers were “laser-focused” on integrating the acquired firm. Remarkably, implementing this rather large investment does not even make non-alpha acquiring advisors’ list of top seven challenges.

While hurrying the transition is vital, the report emphasizes the desirability of not rushing into a deal, noting that fully a third of alpha acquisitions took three or more years to find (and for another lucky third of advisors, successful deals presented themselves to the acquirers).

A key to finding the right practice involves client-service model compatibility.

Other key takeaways involve the financing of the deals, with alpha acquisitions more likely to leverage loans that enable paying a higher multiple on higher-quality practices; and the valuation of acquisition targets, with alpha deals taking a more holistic view across a variety of evaluation criteria to properly value the practice.

The study also highlighted practices, such as changes in the management of client portfolios, which seemed to bear little relation to the success or failure of the acquisition.

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