Practice Management

With mergers poised to increase, are you ready for the next step?

The mergers we may see as a by-product of the DOL rule are likely to be trickier — and more permanent — affiliations, and advisers will need to do their homework

Apr 21, 2016 @ 9:58 am

By Joni Youngwirth

The financial services industry is on edge right now as advisers scramble to figure out just what the new Department of Labor fiduciary regulations will mean for their businesses. Advisers who are already part of larger ensemble practices are probably better-positioned to handle the increased compliance requirements while simultaneously deciding whether to convert commission-based accounts to fee-based programs.

But what about smaller, early- to mid-career solo advisers? For them, the solution may lie in merging their firms with larger organizations.

Mergers have been on the rise for several years, but they have frequently been “temporary” mergers, in which tenured advisers sell the majority of their book to another firm and stay on to manage a smaller subset of clients during the earn-out period of the sale. The mergers we may see as a by-product of the DOL rule are likely to be trickier — and more permanent — affiliations, and advisers will need to do their homework to help ensure long-term success.

(Related insight: Commonwealth's Rooney: Expect industry consolidation in the wake of DOL fiduciary)


Mergers are a bit like weddings. A couple spends more time planning their wedding day than their actual marriage, which (hopefully) lasts much longer. Likewise, those involved in a merger spend more time focusing on the first month of the union than on the long-term viability of the relationship. But planning ahead in anticipation of potential longer-term issues can make for a more successful merger for all parties. Here are some points to consider:

• Envision the future you want. What if you were no longer a solo organization? How would you operate the business differently than you do now? How would potential partner firms benefit from merging with you, and vice versa? Don't merely think about the responses to questions like these — put them in writing. Unless you are clear on what you want, you may find yourself agreeing to the merger others want.

• Identify whom you might merge with. Often, mergers occur between two individuals who are friendly. Although chemistry is critical, even the best of friends can't sustain a merger if their vision is not aligned. Consider interviewing three to five merger candidates and addressing key questions.

• Complete due diligence. After the interviews, dig deeper with high-potential candidates by addressing issues such as:

o What a merger means, since definitions vary from sharing space to accepting liability for each other's behavior, to continuity planning.

o How you and the other party are aligned on factors including production, niche, ideal client profile, average client, product mix, business model, delegation to staff, orientation on marketing, fee structure, payout, expense management, decision-making authority, client “ownership,” operational processes and technology used (e.g., CRM, financial planning software, model management).

(More: How to solve operational issues from M&A transactions)

• Create a game plan together. Put together a one- to two-page game plan that includes a vision statement for the merged firm, strategic directives defining where the firm is headed over the next three to five years and specific measurable goals for both parties over the first 12 months.

•Codify the working relationship in an operating agreement. Set out financial agreements, the process for decision-making, the regularity of business meetings, processes for the ongoing evaluation of the merged firm, how conflicts will be resolved and how to undo the partnership if needed.

• Execute the deal and maintain the merged firm. Assuming the evaluation criteria for the merged firm have been articulated in writing, the ongoing maintenance means actually doing what was agreed to. If the merged firm is not yielding the expected results, is that the result of unforeseen changes, unrealistic assumptions or something else? Set annual goals as the basis for ongoing assessment, and be sure to conduct regular, formal meetings to discuss issues as they come up. A sure way to determine whether a merged firm is in trouble is when meetings stop happening because no one wants to confront critical issues.

With mergers poised to become even more common in the wake of the DOL rule, it's wise to think proactively about how to establish a long-term plan for success.

Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network.


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