I recently participated in a panel discussion at Schwab Impact, detailing various ways to streamline your firm's operations to enhance growth either through acquisition or by opening offices in new locations. The session was so well-attended, Schwab needed to scramble to find us a larger room — this is obviously a topic that is on a lot of advisers' minds.
We tell firm owners all the time that before they can start looking to acquire another firm or more advisers, they need to make an honest assessment of their own back office technology and procedures. The No. 1 reason an adviser would look to merge with a larger firm is because he or she is wearing too many hats and wants to outsource all operational responsibilities to the acquiring firm. If you are still running your billing exceptions through an Excel spreadsheet, or if it takes your firm over a week to implement a model change across your client base, you are not going to look attractive to a potential merger candidate.
Assuming you have your house in order, the biggest question from those in attendance was, what should we be looking for in a potential merger candidate? First off, you need to have similar investment styles — if you are an active stock picker, merging with a passive adviser probably won't be a match made in heaven. If you are 100% fee-only, and the candidate's book of business is 75% commission-based, there may be problems with synergies. Also, geography must make sense — the candidate has to create access to a region that you are interested in.
Beyond that, chemistry and cultural fit will be the most important. The best advice I have ever heard regarding mergers: “You will spend 90% of your time pre-close focused on economics, and 10% focused on cultural fit. Once the deal closes, success will be 90% determined by cultural fit and 10% determined by economics.” In author Michael Lewis' keynote address, which closed the Impact conference, he discussed the horrible short-term incentives placed on wirehouse advisers — when management wants you to go in one direction, and you want to go in a different direction for the best interest of your clients, big problems can arise very quickly. Be sure to spend some quality time together before signing on the dotted line to ensure that both your short-term and long-term goals are in sync with one another, and you have an agreed-upon road map to reach those goals.
If the stars have aligned thus far, you now need to work together to create a unified client experience. This goes for a merger transaction, or any advisory firm operating from two locations — clients should receive synonymous marketing messages, performance reports, holiday cards, etc. Most importantly, investment management should be consistent across the firm — you do not want two clients of similar risk tolerances or time horizons to experience drastically different investment results. This will not only create a compliance headache (the Securities and Exchange Commission will ask, “Why weren't these clients treated the same?”), but a sales headache as well (imagine if these clients have lunch together — the client with the worse performance will ask, “Why am I not getting your best investment ideas?”).
Once you are confidant clients will be happy with the expanded firm you are creating, you want to make sure employees will be satisfied in the new environment. It is only natural for employees to fret and wonder, “Will there be a role for me, post-merger?” If there are two employees with similar roles, clearly define before the merger is complete what each person's duties and responsibilities will be in the “new world.” The worst thing you can say to a key employee is, “Let's wait and see. I'm sure a role for you will develop over time.” You are asking them to make a commitment to you — the least you can do is commit to them a role that is both challenging and rewarding.
If you have impressed your acquisition target with your ability to relieve him of his current operational headaches; you have identified a target that is both geographically and culturally exciting to you; you have managed to create a uniform client experience across your entire firm; and you have satisfied employees with roles and responsibilities that challenge them and allow for career development, you should be able to attain the elusive merger math of 1 + 1 = 3.
Matt Sonnen is a vice president at Focus Financial Partners.