Taking over an adviser’s book can be a risky venture

Stepping into the shoes of a retiring financial adviser may sound easy compared to the business development efforts it takes to recruit an entire practice of clients.
But even after making it through the difficult task of completing such a deal, many challenges lie ahead.
Advisers may face hurdles establishing trust with clients or just navigating a mixed bag of client personalities and their multiple ordeals, experts said. And depending on the extent of the takeover, advisers may find themselves dealing with new employees and potentially incompatible technology.
“It sounds simple in concept, but it takes months, if not years, to transfer credibility from owner to successor or new owner,” said John Furey, founder of Advisor Growth Strategies, a consulting firm for advisers.
After buying a retiring adviser’s practice in 2009, partners Mathew Driscoll and Kelly Christensen learned how difficult it is to inherit a mostly manual, paper-based client management system.
“People would call us and we didn’t even know who they were,” Mr. Driscoll said. “We had to dig through file cabinets, and about half of the client files had been lost due to a flood at some point.”
The retired adviser apparently had a photographic memory that he tapped into when clients called.
“To this day, he still can recite client phone numbers,” Mr. Driscoll said of that adviser.
(More: Advisory firms aren’t worth as much as advisers think)
The partners, advisers with Principal Financial Group in Cedar Falls, Iowa, took over the business of a second retiring adviser in 2013. Both of the advisers the partners took over from had focused on products, mostly mutual funds and variable and fixed annuities, while their focus is on asset management, Mr. Driscoll said.
That difference required a lot of education about the options available to clients, he said.
Because personality is a big part of why someone chooses to work with an adviser, it also can be challenging if the new adviser’s character doesn’t match up well with clients.
When buying a practice, both the good and bad clients are part of the deal.
“The vast majority are good, but you’re not building things in your own natural network,” he said. “You have to be able to adapt and work with a wide range of people and circumstances.”
It’s helped that Mr. Driscoll and Mr. Christensen work as a team, so they can both meet with clients who are part of the retiring adviser’s book and figure out who a particular client is most comfortable working with regularly.
With acquisitions of larger practices, sometimes employees come along with the deal. That, too, can be a positive or negative factor.
Staff can help with clients for some continuity, but it’s also difficult sometimes for employees to accept the new ownership group, Mr. Furey said.
Taking on the other advisers’ employees hasn’t been an issue for Mr. Driscoll and Mr. Christensen, because the adviser from one acquisition took care of everything himself and the other only had his wife working for him — her employment wasn’t included in the deal.
(More: RIA M&A deals picking up steam)
It’s natural to think it would be great for the retiring adviser to introduce his or her successor to clients, but that’s not always the case.
It’s hard to show clients what the new advisers can do differently to add more value to the relationship while the original adviser is sitting there, Mr. Driscoll said.
“When we’re trying to establish a relationship, we aren’t trying to say that the adviser they worked with the last 30 years did anything wrong,” he said. “We try to show how we take a different approach.”
In the end, many advisers find acquisitions are worth the challenges.
About half of advisers who have acquired clients in the past would do it again, according to a Financial Planning Association survey of 434 financial advisers from November 2014.
About 58% of advisers who have purchased practices considered it a “very effective” strategy for growth.
Mr. Driscoll said he and his partner are likely to do it again.
“Absolutely, it was a good opportunity that allowed us to scale things up rapidly,” he said.