by Bonnie A. Hughes, CFP®
Bonnie A. Hughes, CFP®, is a principal with American Capital Planning. She holds a bachelor’s degree in family economics and management and a master’s degree in financial planning.
Mark Hurley, president and CEO of the Fiduciary Network LLC (www.fiduciarynetwork.net), created a stir with the recent report, Creating, Measuring and Unlocking Enterprise Value in a Wealth Manager, which suggested that very few wealth management firms have any enterprise value.
What if Hurley’s right? What if after decades of diligent hard work, good compensation, and deep relationships with clients, there is a big gap between what you the owner and someone like me, a prospective buyer, believe is the real value of your business? Or someone not like me. I am a CFP® certificant since 1992 who has owned a tax service, a fee-only financial planning firm, managed a larger fee-based financial planning firm, and now I own another fee-only firm. There are banks, brokers, and plenty of other suitors for any seller to seriously consider. This column assumes a practice under $300M in assets under management where the seller(s) are working with a team of professionals to help them determine their ultimate goals in the process and have devised a framework to make that come about. My focus here is on the RIA buyer’s perspective. I welcome insights from sellers and other buyers so we can learn better how to make more of these deals work out well for both sides.
But what does the buyer consider? Talking to people who have been through this process, it’s a little like the idea of men being from Mars and women from Venus. Each person makes perfect sense to their own kind and little sense to the person with whom they are trying to communicate and negotiate.
We have some fabulous pioneers in our young profession who, by putting one foot in front of the other day after day, down year after up year, are ready to get on to new adventures in their lives and are looking for that perfect match to ensure the well-being of their clients, their employees, and their own legacies.
I want to share what I found very helpful from my review of the Hurley report and a counterpoint of that report by Tim Welsh, president and founder of Nexus Strategy Inc. (www.riabiz.com/a/1785003). Mark points to the need for shared risk between the buyer and seller. This risk sharing involves current risk in the transition and future risk as the transition unfolds over time. Tim doesn’t disagree with this and sees lots of opportunities for sellers to strengthen their bargaining position if they can get their systems and staffs up to date.
Tim takes issue with the gloom and doom tone of the Hurley report. I’m in Tim’s camp on this—the advisers who built these businesses are very smart, ethical planners who want to have a meaningful legacy after they leave the firm. The advisers who seek to be the succession solution for those advisers are cut from the same cloth and they should also be adding vision into a world that will be different, faster, and more complex, yet must still have solid client relationships at its core. If two people want a deal to work, they will find a way that feels fair to both parties and sets the transitioning firm on a path of growth and continued excellence.
Tim also points out that the value advisers have in their firm is not with them, it is what they leave behind. He goes on to say the best way to build business value is to instill business discipline, invest in technology, develop your staff, and have a long-term view. In many respects, he is in agreement with Hurley’s findings. Tim is an expert at translating the leverage an adviser can enjoy after an investment in technology both at the staff level and on the sale of a business.
My Merger Explorations
My experiences so far in my quest to find the right match for me run along the spectrum of practices. Two years ago, I merged my prior firm with a larger firm in anticipation of succeeding the out-of-town owner. That merge failed for many reasons and my concerns echoed some of what the Hurley report lays out. In exploratory conversations with three other RIA firms, some of the same issues keep coming up. They include a staff that is not up-to-date on their training in many areas including processes and software. In one case, the firm does not have any planning software, no contact management software, and in my estimation, has accounts to sell, but not a business. Some firms are many versions behind on their software. Other times, the strength of the relationships resides solely with the marquee planner (often the name on the door) and not with the firm. That creates some issues for a future buyer and surely lengthens the transition time. Sometimes, parsing the accounts, we discover a significant number of “legacy” (think low fee) accounts or family and friend accounts that the selling adviser wants to keep indefinitely. None of these things make the deal impossible, but as the buyer, I want these risks shared through price negotiation. And I’m finding that owners are living with old values from more flush times or they want a price based on out-of-touch formulas that are not flexible in considering shared risk.
Discussing staff issues, it may be the rare smaller firm that (1) has more than one person bringing in business and (2) pays anyone for bringing in new money on existing accounts or new clients. No goals appear to be in place for new business, so of course none of that is measured let alone rewarded.
What is the marketing plan for the business? Is there one? Some owners seem reluctant to invest anything in the future of the firm having made the decision to leave and even more frustrating, many have stopped marketing far in advance of leaving.
When I’m buying, I need to know a lot of the client demographics. How many clients are consuming capital versus accumulating capital? How messy are the accounts—one adviser routinely had 20+ funds in each account. We’re going to need a transition period that allows us to clean up the accounts while the selling adviser is on board so that, after they exit, the client is not still having lots of changes in the makeup of the portfolios. What is the affluence per client? The revenue per client? The ages of the clients? And at what stages are their financial planning stabilization—has any been done or will the succeeding adviser have to start the process of everything except investment planning?
The selling adviser may need to keep an open mind about the changes the buying adviser needs to accomplish to bring the firm up to current business standards and acknowledge that the way this good firm has been built may not be the way it will grow in the future. The world is changing and smart businesses navigate those changes.
Where You Hang Your Hat
The last snag I want to acknowledge here is location and distance. Is it realistic to think your buyer lives in the neighborhood? Or that they would be willing to relocate permanently or immediately? The world is so much smaller than when I started in 1992. Remote working is common and tools to maintain and grow relationships are outstanding. Can distance be overcome when purchasing another RIA? I believe it can. My firm has clients around the country but concentrated in Atlanta, Napa Valley, and northern Virginia. I live in Northern Virginia now, but my clients have been with me when I lived near them, moved to Miami, and now here. I go see them when it is appropriate, and I love doing that. The cost is not high, the rewards are huge, and when we’re not meeting in person, we’re meeting by phone, in a web meeting sharing a desktop, or by Skype.
What does a practice of the future look like purchased from an RIA under $300M today? Let’s do some visioning and see what we might work out. It includes a name change if the name of the current firm is the name of an adviser. Because one day I too will sell this business and it must sound like a business.
It may include more airplane time between cities. As clients age, it may mean we routinely go to them. I never mind this—it’s a wonderful experience and clients appreciate the concierge level service. It is simply good “fresh air” marketing. The adviser gets out of his or her cocoon, gets into the client’s world, and the client’s world notices that the adviser is there. It works on lots of levels. We don’t drop clients when they move, there doesn’t have to be a reason to drop the adviser when they are physically somewhere else, part time. It absolutely includes technology solutions to execute good processes that support the client relationship.
It’s my desire to see sellers and buyers work hard together for the benefit of their clients, staff, and communities. We can figure this out, and by sharing the risk, the buyer can build a thriving business that grows with clients through time and changes, and leave a beautiful legacy on behalf of the seller.
