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Practice Management > Building Your Business

2 Questions RIAs Must Ask Before a Deal

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At conference sessions on advisor mergers and acquisitions, audience questions often focus on firm valuation. “What kind of multiples of cash flow can I expect?” or “How will an improving/declining economy or market affect the price I can get for my firm?” are commonly heard.

But those questions are misguided, argues Ryan Kelly of the Southern California-based RIA firm Spectrum Asset Management. Spectrum has acquired, or as Kelly likes to say, “integrated,” three other RIA firms over the last six years.

For a successful acquisition, Kelly says, Spectrum takes a two-pronged approach. First, any deal must produce “wins” for three different entities: the client, the advisor and Spectrum itself.

Second, to determine whether the principal of the prospective acquired firm will “win,” Kelly will pose a deceptively simple question to the owner and any lead advisors of the target firm early in the discussions: “If we’re talking three years from today, looking back over that time, what do you want to have accomplished, both personally and professionally?”

That three-year time frame is intentional, Kelly says. “Many people will know what they want to do in the first six to nine months” after a transaction, he explains, but don’t often look out two or three years. The answer helps tell him if the acquired firm’s principal wants to remain an advisor.

Kelly also asks that question of other firm leaders. “Their hopes and dreams may be quite different” than the principal advisor, he says. It’s not uncommon that “one may want to stay engaged; the other wants to go off into the sunset.”

Then Kelly filters the answers through the “three wins” lens, giving him insights into whether a deal will yield the right cultural fit for a successful integration.

How do the clients of an acquired firm win? It starts with the culture of the firm, because “not all firms put the client first.” There’s another part of the process that helps retain clients from the acquired firm.

Again, early in the process, if an advisor who cares for her clients “sees a better home for those clients” at Spectrum with its team approach to serving all clients, she will “want to make sure their clients move into that better home.”

Spectrum wins by adding primarily new high-net-worth clients, the skillsets of the new team members and the benefits of scale.

Kelly says that the challenge he sees in today’s advisor “acquisition euphoria” is that “people are doing deals without those three wins being in alignment.” He adds that it’s “easy to get distracted by the math, but we know from experience that successful transitions are driven by a clear picture of what a ‘win’ looks like.”

About that good cultural fit: Spectrum asks prospective partners to take the Kolbe A Index, which identifies a person’s strengths and weaknesses or, as Kelly says, “determines how you solve problems.”

As Spectrum follows a team approach to serving clients, the Kolbe results indicate where the acquired firm’s advisors and employees will fit into the Spectrum team, “as opposed to creating a separate silo” filled with the acquired firm’s employees. He sees that as a further win for Spectrum and the clients.

Kelly’s personal experience as a second-generation advisory firm owner shaped his approach to M&A. When he joined the firm founded by his father and older brother, he saw a number of “partnerings that didn’t work out well.”

Looking back, Kelly says his family’s candid culture allowed “the three of us to get the three wins in alignment. That’s why I feel so strongly about aligning those wins.”

Kelly still benefits from that family dynamic: his father, R. “Kelly” Kelly, remains Spectrum’s chief investment officer. His older brother Marc is no longer active in the firm, but he does help Ryan with potential acquisitions. When looking at the financials of a deal, Ryan says of his brother, “it’s nice to have a Harvard MBA in my back pocket.”

James J. Green, a former editor of this magazine, is editor of Jamie Green Reports, an advisor-focused writing, editing and shepherding service. He can be reached at [email protected].


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