A delicate situation: Acquiring practices of the deceased

Is it appropriate to try to acquire the clients of a fellow financial adviser who died without a successor?

It is a tough call: You don’t want to come off as an ambulance chaser. And even if you choose to pursue such an opportunity, success is by no means a given.

“There are just so many unknowns when an adviser dies without a succession plan,” said Michael Bilotta, director of Gladstone Associates LLC, an investment-banking firm that focuses on mergers and acquisitions of advisory firms. “It’s a delicate situation.”

But the fact is that with many advisers getting older, and an estimated 80% of them lacking succession plans, this scenario is likely to happen more and more often. For those who want to pursue a recently departed colleague’s clients, practice-management experts recommend that advisers use tact, and that they be prepared to hustle and do a whole lot of due diligence.

First off, timing is everything.

Industry experts estimate that the value of an adviser’s practice without a successor drops by 50% immediately when the representative dies. Although this may offer a chance to buy a valuable practice at a decent price, it also means that if advisers don’t act quickly enough, clients will flee.

“If you don’t have someone in place and the clients don’t know who the person is, [the] practice is worthless in six months,” said Josh Schwartz, an adviser with Retirement Plan Advisors LLC, which manages $1.7 billion in assets.

And without the previous owner there to provide a smooth transition, the adviser who moves quickly may still have difficulty retaining clients.

“Distressed situations like this are challenging and don’t always have positive outcomes,” said David DeVoe, managing director of The Charles Schwab Corp’s adviser services unit. For this reason, advisers should still do all the necessary due diligence on the firm or the adviser’s practice before making an offer to the late adviser’s next of kin, he said.

Key areas to investigate include how successful the other practice was in terms of revenue and client assets, and whether the former adviser’s staff or assistants would stay on after a purchase. The adviser should also make sure that he or she can efficiently handle additional clients, and make sure that the types of clients being acquired provide a nice fit in his or her current practice.

Such due diligence can be tricky without the former adviser there to answer questions, said Mary Sterk, an adviser with Woodbury Financial Services Inc., who wrote “Buy It! The Practical Guide to Buying a Financial Services Book of Business” (Map It Build It Buy It, 2008). Even the simplest paperwork, such as the adviser’s fee schedule and other bookkeeping, can prove difficult to pin down.

“The reality is, even if someone is stepping up to help, you really don’t have any way of knowing what kind of philosophy the other adviser had,” Ms. Sterk said.

Once an adviser decides that the deceased rep’s advisers or practice is worth pursuing, he or she must work the phones and set up interviews with clients to persuade them to stay.

Gregg Fisher, owner of Gerstein Fisher & Associates Inc., which manages $1 billion in assets, recalls that just after buying the practice of a deceased adviser in 2001, he discovered that his new clients were quite different from those on his roster. Many of the new clients were retirees in their 70s; at the time, Mr. Fisher was 30.

“It wasn’t easy to maintain those client relationships. He had a class of clients that were smart, sophisticated investors, and all of a sudden, they see me — a 30-year-old kid,” Mr. Fisher said.

“I was cold-calling people, trying to convince them to stay,” he said.

Mr. Fisher said that he managed to keep most of the 60 new clients but that it took months of client meetings and phone calls to win them over.

Adding another layer of risk for acquiring advisers is the fact that many of these deals are structured heavily with “earn-outs,” or contracts stipulating that the surviving spouse gets a certain percentage of the firm’s earnings for a period of time, often up to seven years.

“There’s totally more risk for advisers,” said Steve Levitt, co-founder and managing director of Park Sutton Advisors LLC. “You don’t have this key individual in play to ensure the transition of assets.”

But many advisers said that signing such a contract is the proper thing to do.

Rocco Scarsella, an adviser with RWS Financial Group LLC, which manages $400 million in assets, said that on two occasions, he has bought the practice of an adviser who passed away. In both situations, he said, he worried that the surviving spouse may have been left with nothing, had he not taken over.

“You do what’s right,” Mr. Scarsella said.

Still, these deals aren’t for everyone.

Bruce Primeau, an adviser and vice president of Wade Financial Group Inc., which manages $300 million in assets, said that he was forced to make a tough decision when fellow Minneapolis-area adviser Robert Markman, owner of Markman Capital Management Inc., committed suicide Feb. 19. Mr. Markman didn’t have a succession plan.

Bruce MacKenzie, an attorney for Markman Capital with Dorsey & Whitney LLP, sent letters to Mr. Markman’s clients suggesting that they find another adviser. Mr. Markman was the sole adviser at his practice.

Mr. Primeau began getting calls from Mr. Markman’s clients, who were worried about their assets. In the past several weeks, the former has met with six of the latter’s clients and taken on two of them.

Mr. Primeau has also put out feelers about buying the client list, though he admits that it is uncomfortable. He hasn’t heard back from Mr. Markman’s office.

“I’m more interested in making sure these clients have a home,” he said. “I don’t like people being out there without anyone minding the store for them.”

E-mail Lisa Shidler at [email protected].