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Solving operational issues from M&A transactions

These deals are much more complex than RIAs ever imagined, and they require specific operational expertise to harness promised synergies

Apr 18, 2016 @ 12:01 am

By Matt Sonnen

As the wealth management industry continues to age, the number of advisory firms that will be transitioned due to succession planning or principal retirement is expected to increase dramatically. In fact, 2015 was the largest year on record for RIA mergers and acquisitions, with 2016 predicted to have even more.

This trend, driven both by demographics and the success of the RIA space, has created opportunities for savvy firms to harness M&A transactions as a powerful growth engine. High-profile headline deals are creating excitement in the industry, encouraging many firms to jump on this bandwagon in order to capture the "1 + 1 = 3" value-added premium being promoted by the many industry consultants, aggregators and platforms involved in the space.

However, as many firms are learning, M&A transactions are much more complex than they ever imagined, and they require specific operational expertise to harness the many promised synergies. Even the largest, best-resourced firms are highlighting this issue as a limiting growth factor. Rob Francais, CEO of $9 billion RIA Aspiriant, points to the lack of operational transition resources as the primary reason for the slowing of their expansion plans.

There are many industry resources and consultants to help with up-front issues involved in the process, such as determining valuation and deal structure, along with integrating the firms' cultures, philosophy and organizational structures.

What's missing is what happens after the handshake.

For many M&A transactions to realize promised benefits, it is clear that there needs to be a key focus on the operational integrations involved in truly combining the two firms into one. Even smaller, tuck-in mergers bring with them complexities that few advisers focus on until after the deal is consummated.

But by then it may be too late.

Specific areas, such as what to do with multiple custodian relationships or duplicative vendor contracts, need to be resolved. Which CRM system will be used? And what about performance reporting, trading, rebalancing or even which shredding company will be kept? How do you train and transition staff to the new systems?

Further complications arise from real estate contracts, such as potentially needing new office space to handle the larger organization or how to assign the seller's lease to the buyer.

Discrepancies between client agreements need to be ironed out as well, such as what to do if one firm bills in advance while the other bills in arrears. Even basic firm identity and branding on websites, business cards and stationary need to be integrated, bringing up yet another task for the combined firms to manage.

If these key operational integration issues are not addressed in advance as part of the overall transition plan, it can often lead to situations where the operations of the entire firm need to be shut down for an extended period of time. This gap in service can lead to current clients feeling neglected, putting the relationships of the transitioning clients at risk.

In our experience, the key to solving this operational dilemma is to make this issue a priority in any negotiations prior to any signatures. Training a few key employees ahead of time, before the merger, goes a long way toward building integration muscle and capacity in the firm.

Additionally, bringing in specialized consultants experienced in these operational aspects of M&A integrations can help in building a process and checklist, and assist in streamlining and implementing the additional workflows.

Industry experts all agree that there will be a growing demand for ownership transitions to ensure the continuity of the wealth management space. To take advantage, growth-minded firms will need to better equip themselves in the operational aspects involved or risk missing out on this once-in-a-generation opportunity.

Matt Sonnen is CEO of PFI Advisors.

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