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GUEST ARTICLE: Don't Make These Mistakes When Acquiring A Wealth Management Firm

James Poer, Kestra Financial, President, CEO, November 11, 2016


The business of buying - or selling a wealth management firm has its particular challenges. Not all M&A deals prove happy marriages. What are the ways to ensure a tranquil and prosperous relationship?

In a week dominated by the US elections, it is a relief to take a break from the political circus and return to some of the more fundamental business issues that the wealth management sector faces.

There has been plenty of merger and acquisition activity in the sector in recent years. And yet, as M&A watchers know, a relatively sizeable share of mergers and acquisitions can destroy, or at least not enhance, long-term value. With a people business such as wealth management, getting firms to gel together in deals and retain clients is a particular challenge.

With all this in mind, James Poer, who is president and chief executive of Kestra Financial, an independent financial advisor platform headquartered in Austin, Texas, talks about some of the mistakes to avoid and moves to pursue in wealth management M&A deals. As is always the case, while the editors of this publication welcome such contributions, they do not necessarily share all the views of such guest items and invite readers to respond.

The M&A market for wealth management firms in the US is on fire.

The number of total deals hit another all-time high in 2015 with 123 transactions, up 37 percent from the prior record set in 2014. The average asset under management of firms selling their business also rose significantly to $855 million in 2015 as the industry engages in larger transactions.

The market for deals in 2016 has shown little signs of slowing down, with many predicting another record year in terms of M&A.

A number of factors are stoking this acquisition boom. First, business owners are beginning to recognize the benefits of scale and are seeking partners who can provide it. With added scale, firms have the ability to make investments in technology and to realize reduced compliance and operational management costs.

Adding fuel to the fire is the aging population of wealth management firm owners. Firm owners looking to retire present the need for succession planning, and as many owners get older, they lose motivation to organically grow their business.

However, pursuing a merger requires discipline and great care, and conditions must be just right to ensure a successful transaction.

Throughout my career, I’ve been involved in many deals in the wealth management space and have learned some things along the way. Below are three “do’s” and three “don’ts” buyers should consider when evaluating the M&A market.

Define acquisition goals: Buyers must have a clear vision when pursuing a deal. Ask yourself, what exactly do I hope to gain from the transaction? Whether you’re looking for additional size, a complementing book of business or merely a partner, it is imperative to identify your goals at the beginning of this process and keep them top of mind when shopping around. Don’t rush into an acquisition simply because it’s on the table. Take your time and make sure the deal will accomplish your goals for the firm’s future.

Identify areas of alignment: Cultural and operational alignment are extremely important components to a merger’s ultimate success. From a day-to-day operational standpoint, figure out whether the business you are considering acquiring is similar to yours. Do its marketing, client onboarding and performance evaluation processes align with your own, or will employees experience a steep learning curve when the two firms are integrated?

Retain the staff: Simply put, retaining the existing staff of advisors vastly increases the likelihood of retaining their clients. When you purchase a firm, you also acquire the AUM. However, the clients are not guaranteed to keep their assets under your watch. Retaining as many employees of the acquired business as economically possible creates a sense of familiarity with the acquired firm’s existing clients as they are on boarded.

While you can buy control of an individual’s assets, you cannot purchase a person’s trust. Retaining the existing staff creates a bridge for building that trust and sets the stage for a continued relationship.

Lose sight of valuation: Two businesses may perfectly align with one another when it comes to culture, investment philosophy and operations, but if the economics of the deal do not make sense, the buyer must walk away. Look into the demographics of the book of business. Are assets growing or shrinking? Does the selling firm possess other assets like technological efficiencies that will benefit your firm? The answers to these questions will significantly affect the firm’s valuation.

Finding the right partner to finance the deal is also often overlooked. Not only are the terms of the loan critically important to the viability of the transaction, but leveraging a trusted partner with access to capital and a history of financing wealth management transactions can streamline the process and boost your chances of a successful merger.

Make emotional decisions: Falling in love with a certain company or even just “the idea” of a transaction can often cloud a potential buyer’s best judgement. Keep emotions out of the equation to avoid overpaying for the wrong business that is difficult or impossible to integrate.

Fail to define prior ownership’s future role: When purchasing a firm and ironing out the final details, clearly delineate the previous owner’s future role and how long that role will last. Most likely, the previous owner will stick around to support the transition and answer key questions. Twelve months usually provides more than enough time for them to assist with a smooth and complete integration. After a full year, it’s important to have a plan in place to determine his or her future role, if there is one at all, with the firm to avoid confusion about who is in charge.  

As the bonfire of wealth management M&A continues to burn, it’s imperative to keep these “do’s” and “don’ts” in mind when pursuing a deal. To ensure a successful, seamless transaction, the entire process must transpire under intense scrutiny. Be sure to cover all of your bases and think long and hard before signing on the dotted line.


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