How to Take Over a $1 Billion Practice

Financial advisor Scott F. Mahoney, 47, ran into a wonderful way to fund a cushy retirement for wife Pamela and himself about 20 years from now: He took over a fellow FA’s $1 billion practice. Their firm, Morgan Stanley, amicably financed the deal.

Not that the 23-year advisor, already heading the five-person Mahoney Team in New Jersey, was worried about outliving his money. Managing assets of $350 million, he was doing well. But when Larry Palmer, his colleague and friend in California, a top advisor to ultra-high-net-worth clients, made him an offer, he just couldn’t refuse.

The lucrative arrangement was paid for by Morgan Stanley, where the Los Angeles-based Palmer and Morristown-based Mahoney have been employed now for 20 and 10 years, respectively, both starting with predecessor firm Smith Barney.

After more than three decades as a wirehouse advisor, bachelor Palmer, a Type-A highly successful FA named by Barron’s in 2011 one of America’s top 1,000 advisors, decided four years ago at age 50 to wind up his career in five years and segue to the next adventure.

Mahoney, 47, married for 26 years to his high school sweetheart and with three young children, wasn’t even looking to buy a practice to grow his business, which was thriving. But Palmer was giving him the tantalizing chance to add more than 100 super-wealthy clients to his book and expand nationwide.

“I would have been fine without taking on Larry’s practice, but this is a great challenge and exciting opportunity to totally secure my family’s financial future forever. Over the next 20 years, I’ll pretty much double my income; but I don’t need to spend that [additional] money. So I’m going to put it in an account, and that will be the money my wife and I can enjoy during our golden years,” says Mahoney, a self-described “think-it-out, stay-up-late planner” kind of guy. He was reared in modest circumstances in Ringwood, New Jersey.

Nowadays, practice acquisitions are commonplace, especially at wirehouses, which of course have a vested interest in transitioning a retiring advisor’s client assets to another of the firm’s FAs in order to retain the accounts. To this end, the large firms have implemented structured programs for funding such transactions.

“The wirehouse channel is the least challenged in terms of retaining client assets during the succession of a practice because they’ve proven to be very effective at tying [advisors] up in handcuffs. They have formulas and strategies where a [successor] advisor pays out a certain amount of revenue and the [exiting] advisor can walk out with some money,” says James Poer, president of NFP Advisor Services Group, a large independent BD and RIA based in Austin, Texas.

Last year, 100-plus FAs signed up for Morgan Stanley’s Former Advisor Program (FAP), in place now for more than a decade. The most successful transitions are between FAs who previously partnered together. For solo advisors, the firm maintains a proprietary website where they can search for candidates with whom to participate in the program.

In the wirehouse space, on average “every 10 FAs … are responsible for 5.9 acquisitions,” a substantially higher amount than in the RIA channel, where “10 advisors can count only 2.6 acquisitions among them,” according to a July 2014 report, “Alpha Acquisition: Maximizing the Return on Your Practice Investment,” from Aite Group and NFP Advisor Services. FAs at wirehourses and large regional BDs, this research shows, account for 40% of takeovers, split evenly between the two segments.

Morgan Stanley doesn’t term practice acquisitions “buy-sell transactions.” Rather, says Barry Goldstein, managing director/COO for field management at Morgan Stanley Wealth Management, “it is a retirement program and transition of the retiring financial advisor’s book to the successor advisor.”

The level of FAP takers has been flat for the last few years but now is likely on the increase because of 2014′s enticing enhancement to the program: a “Platinum” deal featuring a large upfront payment to the departing FA. Qualifying for this primo option requires a minimum length of service and high revenue thresholds.

Because the upfront money is paid before the advisor’s book is transitioned, Platinum, Goldstein notes, poses a financial risk to the firm, unlike its four other FAP options.

Palmer and Mahoney are the first advisors to secure a Platinum agreement, which provides payment of 50% of the retiring FA’s trailing 12-months’ gross revenue at the time of signing. Further, the agreement calls for a split, negotiated by the FAs, in which five years’ future revenue is paid out to the advisor who’s retiring: In the Mahoney takeover, Palmer will receive 70% in the first year. The exiting FA’s portion gradually decreases to zero over the five years. MS’s other FAP options provide for a revenue-split only.

This particular deal finalizes in May 2016; but in a soft close, Mahoney already is running Palmer’s LA office and team of eight. Palmer, still serving clients, comes in three and a half days a week. For now, the practice is dubbed The Mahoney/Palmer Team.

East Meets West

Their deal is unusual, for one, because the combined practice, now with $1.3 billion under management, is bicoastal and will remain so even after Palmer leaves: Mahoney, keeping his New Jersey office and team intact, will travel to LA for a week or more monthly. Operations teams are maintained on both coasts. Two employees in MS’s Denver office are also part of the package.

“Through this merger, we’re creating a national footprint,” says Santa Monica, California, native Palmer, 54. He began in the industry as a 21-year-old intern at E.F. Hutton, then went to Kidder Peabody before joining Smith Barney. Act II for the Ironman Triathlon finisher will focus on volunteer coaching high school football and business consulting—but not for Wall Street.

“I love the financial services industry,” Palmer says, “But I don’t want to work as a financial advisor in the current environment. I did a great job, and now it’s time to go. I did everything I wanted to do on Wall Street. I thought that the best thing I could do for my clients was to find them someone younger with more passion than I have and who wants to take them to the next level.”

Another atypical aspect of Palmer’s retirement is that, in a post that Morgan Stanley created especially for him, the FA has become managing director-senior advisor to field management, counseling the firm’s leadership about major FA and client initiatives. Palmer has already taken up these duties, for which he is compensated separately. He says he will remain in the position “as long as the firm needs” him.

As for New Jerseyan Mahoney—who began at Prudential and was with Merrill Lynch right before moving to Smith Barney—he’s getting the hang of battling LA’s traffic and sprawl.

“In New Jersey, I drive to six meetings a day; in LA, I can get to only three,” he laments, now having worked in MS’s Downtown South Flower Street office for several weeks over five months. He has adjusted far faster to the casual Southern California business dress code of sports jacket and slacks, replacing his customary East Coast suit and tie.

The Palmer-Mahoney transition seems ideal because of strong similarities between the two FAs’ holistic wealth management practices: Both focus on large liquidity events of mid-market entrepreneurs who are selling their businesses, and those of stock-divesting corner-office executives.