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.