December 30th, 2019 · 7 min read
The range of partnership types is broad, from loose referral pacts and still relatively ad hoc wirehouse and independent-brokerage teams, to contract-bound RIA mergers. Whatever form your business partnership with other advisors or practices takes, there are a number of vital considerations to review when developing your new team.
Financial advisors form business partnerships mainly to build bigger practices that are better able to handle change — including transfers to next-generation leadership — more attuned to their clients, and eventually more profitable as a unit than as the standalone practices they used to be.
But there is an unfortunate truth lurking behind all the record-setting M&A activity in the financial-advice industry. In most cases, mergers don’t achieve what their architects had in mind.
Consider these findings from a recent Deloitte study on all M&A activity, not just in the financial-advice industry. The consultancy says the three main reasons buyers and sellers contemplate mergers are:
Deloitte also lists the principal factors to achieving success post merger.
It may also be worth knowing Deloitte predicts a 79% increase in the number of M&A deals over the next 12 months, a whopping 70% hike over 2018.
The first and maybe most important ingredient for a successful partnership of advisors is that elusive quality some call “culture” and others call “chemistry.” At its core, the concept of culture in this context boils down to being on the same page when it comes to work — especially around expenses, client service, investment styles, fees, and adherence to the fiduciary standard.
Past that, chemistry/culture can leak into things like business locations, office decor and workplace dress codes. It’s best to be in agreement on such things, large and small, and to make the agreements explicit rather than assumed. After all, a merger of firms may work in terms of the financials but show gaps in cultural terms where, say, a white-shoe firm that caters to Old Money seeks to link its fate with a dress-down outfit that specializes in tech executives.
The plain truth of the matter? Advisors who are successful alone aren’t always going to be successful together. The key to avoiding such an outcome is to implement a strategic compatibility assessment to avoid any unfortunate and unharmonious entanglements that could make your life more difficult down the road.
Communication with staff members is vital, in the run-up to a merger and afterward. Though many advisors hesitate to burden junior colleagues with the details of an evolving deal, the fact remains that these colleagues play a vital role in maintaining client relationships, ensuring operational efficiency, and shaping the public’s experience with your brand. Leaving them in the dark is a mistake that can make them fear for their jobs, start the rumor mill working overtime, and lead to a demoralized staff and diminished outcomes in all areas of your business.
So go ahead and shed light. In fact, an efficient process of appraisal and selective disclosure may suggest specific ways your staff’s participation could advance your practice's prospects in a coming partnership. Team work on this level sets the agenda for handling sensitive processes and key projects that contribute to the assessment phase, and help the unified practice that grows out of the merger to reposition staff in the most effective manner.
If great internal communication is already a hallmark of your firm, it will serve you and your partners well in the newly merged firm. If it isn’t, the run-up to a new partnership is a wonderful time to start exercising those muscles with a view to building a stronger culture over time for both sides of the partnership.
Here it’s important to know that what seems like a cultural clash in the making may in fact point to potentially beneficial differences. Sometimes a hard-edged partner can work well with an advisor who is a softer touch. The one can close deals and stare down the opposition, while the other calms nerves and makes clients and staff members feel deeply appreciated.
Stated simply, generalizations about M&A activity in the wealth-management space mask the fact that no two mergers are alike, and that being overly dogmatic about what constitutes a “good fit” for your firm can leave otherwise promising partnerships on the table.
One of the biggest factors in a successful merger is due diligence. It should be the basis of your M&A strategies with specific firms because it aims, first and foremost in determining compatibility. In fact, the lack of thorough vetting procedures is largely, if unsurprisingly, a consistent aspect of partnerships that eventually fail.
Think of it this way. When you buy a car, you do research, right? You first compare the type of vehicle you’ve got in mind to others of similar ilks and price ranges, and when you’ve got a specific vehicle in view, especially if it’s had a previous owner, you pour over its CarFax report until you’ve got a sufficient grasp of its history to make a decision.
Do the same thing with any advisor you’re considering as a partner. What’s her background and history? Why did she start the firm? What do former bosses and colleagues say about her now? In other words, get the CarFax on potential partners and their practices in the form of insight on their financial and business metrics.
Another vital part of the run-up to a merger is determining value. This calls for making sure the combined services of the practices contemplating tying the knot actually add up to something of greater value, and not a mere litany of duplication. To this end, it’s best to agree on a roadmap and a timeline for the two practices to achieve success once they’ve come together. This should be a solid blueprint to guide future decisions — rather like the constitution of a nation — that provides for changes to be made in a fair and orderly fashion.
The process of determining value should also shed light on who in the merged firm will handle what roles based on the individual’s training, history and inherent strengths. As mentioned, the ability of partnered advisors to play off each other’s strengths and make up for shortcomings can give them a sense of competitive dynamism they’d never before experienced. But the key to achieving this happy state is having the right talent in the right roles — and formulating procedures to address inevitable — if only occasional — gaps in talent.
Some financial-advice firms also form partnerships to save on costs, mainly through outsourcing, streamlining, and cost sharing without actually merging. These efficiencies can increase revenue, and stand as a competitive advantage or equalizer, especially in crowded markets. Of course, where both firms in a non-merger partnership offer complementary services with minimal overlap, the new firm could attract more clients — and lead to robust referral streams, and provide the basis for compelling joint marketing campaigns.
Another vital aspect of merger planning is exit planning — an often overlooked facet of such deals. Advisors hoping to make quick getaways may be surprised to learn that their partners expect them to stick around a lot longer. And even where such expectations are made explicit, the partners may lack processes for undoing mergers that don't meet stated expectations within a set time frame.
This backup plan — obviously entered into hoping it will never come into play — will help both firms get out the deal in a timely manner and in a way that lets both businesses focus on recovery rather than dealing with a complicated divorce.
In every aspect of forming partnerships between advisors, members of Chalice Network are covered. Chalice’s Succession Link platform has grown in recent years into the largest marketplace for M&A activity in the RIA and brokerage spaces, facilitating everything from transfers of modest books of business to multi-firm, roll-up style acquisitions.
Succession Link helps potential partners find each other without initially identifying them or sharing their specific financials. It’s up to both parties to use the system’s built-in live chat and messaging functions to take matters further. This non-invasive setup makes Succession Link an excellent matchmaker for any and all partnership types.