"WEALTH MANAGEMENT IS THE NEXT GREAT GROWTH INDUSTRY"

Mark Tibergien seems an unlikely wheeler-dealer.

The mild-mannered 46-year-old principal at Seattle certified public accountant firm Moss-Adams LLP speaks in measured sentences, weighing his thoughts carefully — in short, the very image of the CPA.

But Mr. Tibergien has carved a niche for himself as perhaps the foremost expert in the country on valuing financial planning practices. He’s a regular on the industry’s conference circuit, urging advisers to think of their practices as businesses and improve their profitability.

In so doing, he has become a highly sought after consultant, preparing planners to negotiate deals with banks and other would-be buyers.

Mr. Tibergien has been toiling in relative obscurity for some 10 years, first at Management Advisory Services Inc., which he headed until its 1994 sale to Moss-Adams.

Yet his work is only beginning to attract attention — from well-heeled financial shops wanting to buy investment advisers, as well as broker-dealers looking for ways to keep their reps in the fold.

Q How did you get into this adviser-valuation racket?

A I served on the national executive committee and board of the International Association for Financial Planning from ’87 to ’91. What happened then was I continued to help planners who had business owner clients deal with issues related to valuation and business management, but 10 years ago some of them started saying, “You know, we’ve got the same stuff in our own firm, can you help us?”

That was a good 10 years ago, but in the last three years it’s really been explosive. It’s really become quite a big deal as people in the industry started getting to the age when they’re thinking of getting out.Q How much time do you spend with planners and prospective buyers?

A I think I had maybe 50 or 60 engagements last year, and 40 of them were probably related to valuation. People say, “I need to value my business because I’m thinking of selling.” It usually turns into a question of how do we make this business more profitable or how do we create an orderly transition plan. Q Since you started doing this, how have things changed in terms of the drive toward consolidation and people’s interest in selling ?

A We conduct these surveys about every other year. We ask a bunch of questions related to financial performance, but we also ask some softball questions like, “How big is your firm in terms of number of people?” and “Are you contemplating retirement in the next five years.”

What’s interesting is when we first started doing this, the quality of the information was poor, and the vast majority of firms by an overwhelming margin were small sole practitioners with two or three or four people. Most people were thinking about how to make a living, how to survive — not thinking about how to exit.

And in more recent years, what we’ve seen is that practices in general have become larger, that they have become more profitable, the quality of their information has improved. In the survey we did in 1997, 30% of those we asked said they were contemplating retirement within five years. So it’s clearly a demographic change that we’re seeing.

The retirement question, I think, is a little bit nebulous because I think what’s happening is that people in some cases are suffering from burnout. What they’re recognizing is maybe it isn’t an exit from the business, maybe it’s a common consolidation with other firms, maybe it’s this question of, “If we join forces, can we be a more potent business?”

I think that many people are thinking of themselves more like businesspeople — that the key to growth is to consolidate resources, both for financial reasons and reasons of expertise. It may not be an outright sale, but a merger of interests. I’m seeing a lot more discussions along those lines.

It’s funny, now that they’ve become more confident in what they’re doing and they’ve become more affluent, they’re starting to say, “Maybe it makes sense to begin bringing in people with an ownership stake in this business” or “Maybe this is a way in which I can reward people who’ve hung with me for so long.”

Q Or, “Maybe I can take a vacation.”

A Yeah, that’s a good line. That’s very true.

The greatest preponderance (of deals) we’re working on where valuation and ownership transition is an issue are related to internal transactions, where one party is selling to somebody inside the business or somebody they’re bringing into the business. I would say maybe 25% of them relate to an external sale.

Q Have you noted an increased desire in the adviser community for a viable sales option, whether they’re ready to sell now or not?

A Yes. What the broker-dealers are recognizing is if they don’t get in front of this movement, a lot of their production is going to disappear. Occasionally, I’ll talk to a financial adviser who will say, “You know, I’m contemplating this, but I hope you won’t say anything to my broker-dealer.”

For whatever reason, they want to keep it secret, which I don’t think is in their best interests. Broker-dealers, on the other hand, look at the demographics of their reps and say, “We have to make sure we provide for an orderly transition because if they sell it to someone not in our broker-dealer family, we lose that volume.”

So you’ll see broker-dealers like American Express, LPL, SunAmerica, Mutual Service, Sentra, FNIC, FSC, all who are getting in front of this process, saying, “We want to make sure there is a plan in place that we can make this an orderly transition.” I think as a result of it they’re creating a level of awareness of sophistication at the planner level for dealing with this.

Q Do any broker-dealers see this as a recruiting tool to bring over people that are affiliated with other broker-dealers that are looking for an exit strategy?

A Look at it a couple ways: One is to attract a book of business and provide it as a feeder mechanism to their other reps; the other is a way in which to lure people from other firms and to be able to hand them a book of business.

Q Other than broker-dealers, who are the most prominent adviser purchasers? What types of buyers are we likely to see in the future?

A There are strategic buyers, there are financial buyers. There are banks, and there are CPA firms. And as you look at the mix, there are more who are well capitalized who are eagerly looking for acquisitions at different levels. WealthTrust (Inc. in Nashville, Tenn.) would be an example of a firm that may be looking for acquisitions of kind of a mid-market, pure investment manager type. You have a Timber Ridge (Financial Advisors in Marietta, Ga.), which is pursuing financial planning firms, and they’re well capitalized.

Right now, three or four engagements I’m working on are with community banks. I think they’re a real force, and the best I can tell, they also are probably overpaying for practices. But that happens when you become a strategic buyer because you want to quickly get a position in the marketplace, and sometimes you have to pay premiums in that first acquisition. It presents a very attractive alternative for financial advisers who aren’t willing to retire, but who are looking at how they might expand.

I think the same is true in the CPA market. There are a number of regional CPA firms who are in the hunt to acquire practices. What’s interesting is that 10 years ago there was a trend towards that, and then CPA firms and the banks completely backed away when, I guess, they decided it didn’t make sense.

And in fact, culturally, it was very difficult because partners in these firms were very reluctant to hand clients to the financial planners. I think it was all part of the taint that affected the (financial planning) industry back then. But as financial planning has become recognized as a more legitimate profession — where quality people deliver a good service to their clients — many of these CPA firms and banks are recognizing that wealth management is the next great growth industry.

Q Rollup would appear to be a winning strategy in this fragmented field, but that really hasn’t happened yet.

A Reinhardt Werba Bowen has been a pioneer in this industry. With the access to capital that they now have (from new parent Assante Capital Management in Winnipeg, Canada) they’re in a pretty good position. But you always have a challenge as a rollup: Are you trying to buy a collection of independent practitioners and make them work together, or are you going to create sort of a franchise concept where there are some economies in how you do business? Are you going to deliver a management system, or products, or service or a common market identity?

I think if the idea is just to be a large holding company, then I wonder about the real economics of that.

Q So is rollup not appropriate for this field?

A No, I think rollup is appropriate. But I don’t think there’s a formula that is as obvious as it is in more traditional businesses.

There usually are some sort of economies that are gained by one side or the other, or market presence. I think until one of the rollup firms has an adequate critical mass, where they can provide that kind of positioning in the marketplace, it’s going to be a tough struggle. But I think it’s going to happen.

Q Is this industry in need of consolidation at all right now?

A The number of registered investment advisers is projected to grow eight times in the next 15 years. And if they all grow into a bunch of sole practitioners, I think it’s going to remain a highly fragmented market.

I think the market will drive the need for consolidation, just because people are going to need a way to sort through who’s best to deal with.

You can draw parallels to other professions. Doctors are now part of large organizations where you always had a bunch of family doctors. Many people coming into this business, as well as people who’ve been around it for 10 years or so, are saying, “There’s got to be more than just dealing with all these clients every day.”

A common refrain is “I don’t have time to get new clients and service existing clients.” Well, if they remain alone, they won’t, unless they limit the number of clients.

Q Which is obviously what a lot of them do.

A Yeah, except that they still are burned out, and their clients are still dependent on them. And now their clients are starting to say, “What’s going to happen to me if something happens to you?” I think that’s a big issue.

Q What is the single biggest impediment to more deals?

A I think it’s a fear factor. I think it’s a lot of people who have let their work define themselves. If they sell, they sell their offspring.

The second reason is this independence question. It is very difficult for people, if they’re planning to stay with the firm and sell as part of a merger, to deal with having to make decisions jointly.

The third one is culture or philosophy. There are thousands of people in this business, most of whom seem to have a different approach. Finding people in your community, in some geographic proximity, that share your approach and philosophy to doing business is sometimes a challenge.

Q What price can advisers hope to obtain for their businesses?

A There are four basic drivers of value in a practice:

* The return after some level of fair compensation to the business owner — the free cash flow.

* The degree of uncertainty that the book of business will transfer.

* The growth, or the potential for it. If your clients are all over 65 and you have all their money because you got the retirement funds, it’s going to be very hard to grow.

* Transferability. What is being transferred? Have you created a high level of dependency on yourself in your client? If it’s highly commission oriented, it’s a harder book to transfer than one that may generate income from fees, which may be more consistent or predictable.

People are always looking for a rule of thumb. The common ones you hear are one to two times gross revenues, or somewhere between 1% and 2% of assets under management. Rules of thumb don’t make sense for a lot of reasons.

The first is that the economics of one practice to another can be widely disparate. If you apply a multiple of revenue, that means you’re ignoring the underlying economics of the practice.

The second is that by definition a rule of thumb relies on historical numbers. If you say a multiple of gross, what you’re saying is you have to look back in order to make that judgment. Value is a function of the future, and we have to make some assumptions about the future. And so a multiple of gross is saying we expect the past to repeat itself.

Well, I’ve got news for you, when you sell a practice there’s a higher probability there’s going to be attrition in that book of business rather than growth, so if you’re paying on a multiple of historical gross, chances are you’re overpaying.

I use a rule of thumb as a sanity test. After you analyze cash flow, measure risk, look at growth, and identify what’s transferable, then you have to say, how does this opinion stack up against the rule of thumb? And if it’s wildly different, then you’ve got to go back and take a look at your assumptions.

Vitae

Mark Tibergien, 46, principal, Moss-Adams Advisory Services unit of Moss-Adams LLP, Seattle

Experience: President, International Association for Financial Planning, western Washington chapter; president, Management Advisory Services Inc. (bought in 1994 by Moss-Adams); analyst, Willamette Management Associates, covering Northwestern U.S. companies.