Some turnover is to be expected in a merger, but there are ways to minimize it.

Dollars often drive the decision behind a merger or acquisition. It could be the promise of a larger share of wallet from existing clients, greater profitability from creating economies of scale or more fruitful succession planning. What often isn’t discussed, as merger veteran Greg Friedman of wealth management firm Private Ocean pointed out in a 2014 Wall Street Journal article, is the disruption.

The merger may cause some clients and good employees to leave. Unless your merger drastically altered the financial order of things, their departure is probably due to a single factor: a change in culture, whether actual or feared. Suppose, for example, that a firm of easygoing advisors known for first-name birthday notes and a fun annual picnic morphs into a somber group of suits who address clients as “Mr.” or “Ms.”

Your clients and staffers choose to work with you because they like your culture. How can you keep from losing it—and them—in a merger? For some ideas, I interviewed Private Ocean’s Friedman and Brent Brodeski of multi-acquirer Savant Capital Management.

PROTECT THE VALUES BEHIND YOUR CULTURE

“The definition of a culture,” Greg Friedman observed, “is what happens in a firm when nobody’s looking.” Friedman is president and CEO of Private Ocean, a $950 million independent RIA firm in San Rafael, California, formed by the 2009 merger of Friedman & Associates and Salient Wealth Management.

In planning a merger, Friedman believes the alignment of the two firms’ cultures is crucial. “I would argue that it is the key determinant to a merger’s success,” he said. As he wrote in a 2012 blog for ThinkAdvisor.com, number crunching is the easy part: “I’m talking about blending cultures, philosophies, goals and all that other intangible stuff that probably got you started in the first place.”

“Blending” is the key word. “In a merger, neither culture remains 100% intact,” Friedman told me. “What emerges will be a new culture, exhibiting most of the attributes of one of the cultures.”

Friedman & Associates, though only half the size of Salient in AUM and staff, had a culture whose core values Friedman wanted to preserve. “Our culture exhibited characteristics and values important to me—and by extension to the company,” he explained. “People acted with integrity, living up to their word, with passion toward taking great care of clients and each other, and with humor and collegiality.”

A discussion of the two firms’ different cultures was an important part of the courtship process. In contrast to one partner’s collaborative and outgoing environment, Friedman said, the culture at the other company was “very quiet, doors shut, you work hard, you go home.” To address these differences, he and his people met frequently with Salient CEO Richard Stone and his team. “We thoroughly discussed values, how events were handled—everything from client events to employee birthdays. The result is that a new culture was created, a blend of the two.”

Staffers were urged to keep their doors open to each other, and fun activities within the collegial atmosphere were encouraged. “We had turnover,” Friedman acknowledged. “But the new people who came in fit the new culture well.”

At the same time, there was a “tremendous amount” of planning about how to handle the merger with the two firms’ respective clients. “We developed a communications strategy that included timing, method—email, letter, in person—and a series of client events and meetings to address this,” Friedman said. “Of course, some clients were concerned and some eventually left, but for the most part we were successful.”

Can merger-caused turnover be eliminated? Friedman doesn’t think so. “When you merge two companies, culture clashes are inevitable,” he said. “There will be people who will not like things and will generally ‘self-select’ out.”

CROSS YOUR T’S AND DOT YOUR I’S

In Brent Brodeski’s view, “Culture is what makes a firm special or toxic.” Brodeski is CEO of Savant Capital Management, a $4.5 billion RIA firm in Rockford, Illinois, that has made five acquisitions since 2012. “M&A allows us to acquire top new talent that wouldn’t otherwise be available to hire,” he explained. “It also lets us expand our geographic footprint more easily than opening ‘greenfield’ offices.”

Savant formalized a mission statement and defined its values as excellence, faithfulness, trustworthiness, respect, lifelong learning and growth. It also had a non-negotiable investment and planning philosophy. But, as Brodeski said, “Culture goes beyond that.”

Codification of that culture evolved during the acquisition process. For example, Savant determined that its environment would not be ego-driven. “We work as a team,” Brodeski said. “No names are on the door.”

Second, Savant wasn’t a bureaucracy. “As a Midwestern firm, we value hard work, we get our hands dirty, we’re very entrepreneurial and not flashy,” he said.

Third, change was a given. As Brodeski explained, “We believe change is required to grow and maintain our edge. If someone does not embrace change, Savant is not a good place to have a career.”

This focused view of its culture has enabled the firm to be “very picky” in choosing its partners, Brodeski said.

THE RETENTION ISSUE—CLIENTS AND STAFF

Alignment of vision and values has resulted in an extremely high rate of client retention, he said. “Typically, 2% to 3% of clients do not follow to the combined firm. Since at any given time there are always 1% to 2% of your clients who are thinking of leaving, my theory is that a merger or acquisition just speeds up the decision of some clients who were likely to leave anyway.”

In his experience, those clients who do stay on board become quite loyal and remain for the duration. “Most clients appreciate being part of a larger firm that has succession figured out, offers more capabilities and has a deeper bench,” Brodeski said.

What about culture clashes at the staff level? “At a smaller practice where you may wear lots and lots of hats [...], becoming part of a larger firm where you can delegate the non-advisory stuff makes brilliant sense,” he said. “However, inevitably there may be a person or two who prefers to be at a small firm and doesn’t have the skills or interest in taking on a more specialized role. In such cases, the individual often chooses to move on to new opportunities.”

One lesson Savant learned the hard way is the importance of communication. “In our first big deal, we did not pre-sell the ‘why’ and the benefits with all the key players before the deal was inked,” Brodeski admitted. “As a result, we had to play catch-up to get everyone on board. Subsequently, we made sure to get full buy-in from all key team members before a deal was consummated.”

— For more from Brent Brodeski on building talent in your firm, read the August 2015 cover story in Investment Advisor, Next-Gen Now: What Schwab Is Doing to Build Tomorrow’s RIA Leaders.”