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6 Ways for Owner-Advisors to Make Mergers Work

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These days, with the growth of independent advisory firms slowing and competition from brokers and breakaway brokers increasing, more independent advisory firms than ever are looking to grow through acquiring other firms.

This can be a very successful strategy when it works—and it can also be a complete disaster when it doesn’t. Unfortunately, as far as I can tell the odds are about 50-50 either way.

The biggest problem occurs once firm owners find a likely merger candidate: they’re usually far more focused on “making a deal” than they are on determining whether the merger will actually work.

Here are the elements that I’ve found to be essential in making a successful merger (including my personal experience with failed mergers) and how owner-advisors on both sides should think about them:

1) Who Will Be Top Dog? 
I know, this seems pretty obvious, right? Yet I’ve seen more than few mergers unravel over just this issue. The key here is understanding that it’s hard to overestimate how much most independent advisors like their independence. It’s the reason most advisors started their own firms, and being in control of one’s working environment can be very addicting (believe me, I know).

Yet, perhaps surprisingly, I’ve found that in the excitement of a merger, many owner-advisors tend to underestimate the importance of control for advisors on both sides of the transaction. Typically, the owner(s) of the larger, acquiring firm simply assumes that he/she/they will simply continue being in charge while the owner of the acquired firm will become another “junior” partner. What they fail to understand is that owner of the acquired firm is equally used to calling their own shots, and whether they know it or not, going to work for somebody else is going to be a very different situation.

So it’s important for owners on both sides to understand this is going to be an issue. The way they handle it—during the merger negotiations and, more important, after the papers are signed—will determine whether it becomes a problem. The key is for the acquiring owner to recognize that this potential problem can easily derail a merger in the first few months, and to include the new owner as a valued member of the management team, even if the ‘team’ is only two people.

This will take some adjustment on the part of both owners, but will greatly increase the chances of a successful merger.

2) Financial Advice
These days, the independent advisory industry includes a mixture of diverse cultures: RIAs, brokers, insurance agents, accountants, etc. Each of these cultures approaches financial advice and client service a little, or a lot, differently.

While most advisors understand this, I’ve found that they often don’t underestimate the magnitude of the differences and the implications for the delivery of financial advice under the merged firm.

The difference between an RIA’s fiduciary standard and a broker’s suitability standard has been discussed a lot recently. However, I’ve found that the differences between an advisory culture and a sales culture go much deeper. Not that there’s anything wrong with either culture. The problem is that advisors on both sides tend to have little (or no) respect for the other culture, which can make a merger challenging, to say the least. 

3) Career Paths
Another area of frequent disagreement is how—or if—junior advisors can advance and eventually become owners in the new firm. These days, a clear and fair path for junior advisors to become partners is essential to recruiting talented candidates. Yet approaches for how this should happen can vary widely. Some firm owners believe that advancing promising young advisors to a partner level as quickly as possible is the key to firm growth. Others view partnership as kind of a “Holy Grail” to be bestowed sparingly, and only to a select few. While there really isn’t a “right” answer (although I find the most successful firms tend to have more partners), it’s essential that both owners in a merger agree on their partnership philosophy. 

4) The Corporate Culture
Most owner advisors don’t really think too much about their “corporate culture:” other than making their firm a place where hey want to come to work every day. But different advisors like different cultures. Some are more rigid, with fixed hours, codes of conduct, chains of command and dress codes. Others prefer a less formal, more relaxed environment. Again, there’s no “right way” here, except what’s right for the owner(s). But when you’re bringing two firms together, if they don’t share a similar culture to start with, one group is probably going to be very unhappy—from the former owner on down.

5) Compensation
Compensation is one of those areas that varies widely from firm to firm but also has a major impact on employees and owners alike. Some owners maximize profits by keeping employee salaries as low as possible. Others maximize growth by giving employees and partners a share of the firm’s success. At the same time, some owners want to take home as much as possible, while others prefer to reinvest a substantial portion of free cash flow, to grow the business for the future. Again, there’s really no right answer here, but mixing different approaches in a merger usually creates serious unhappiness on one side or the other.

6) The End Game
Finally, I believe that most, if not all, strategic business decisions should be made in light of the firm owner(s)’ exit strategy. Everything from the growth rate of the firm, and its ideal size, to the number of employees and partners, to the owner’s take home pay, is dictated by whether the owner(s) wants to close the doors when they retire, or sell the business (and for how much). Obviously, if all a firm’s owners aren’t on the same page about the end game, someone is going to be unhappy. 

As you can see, making the merger between two advisory firms work successfully is a complicated business. Owners on both sides have to realize that their combined firm will be very different from what their firms were. If the owners on both sides can identify these differences ahead of time, and find solutions that will make the owners and employees on both sides comfortable, the chances of a successful merger will be greatly increased.  


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