The challenges major brokerage firms face in buying a competitor also crop up in smaller deals when financial advisers look to pick up a book of business to build their practice.
In many cases, advisers are coming away less than completely satisfied from the deal, especially when it comes to challenges such as client retention, finding the right seller and uncertainty about who owns the book, according to a survey by Aite Group, a consulting firm.
Of the 167 acquisitions studied, advisers reported being “very satisfied” in only about 25% of the cases across both the wirehouse and independent channels.
The survey, which was conducted by Aite Group and sponsored by NFP Advisor Services, the brokerage unit of National Financial Partners Corp., included about 400 randomly selected financial advisers, a quarter of whom had been responsible for the 167 acquisitions studied.
Respondents reported that client retention was the most difficult challenge. Even in the most successful acquisitions, which the survey called “alpha acquisitions,” the average retention rate was 76% of clients.
A 64% retention rate applied to another group of about 45% of the acquirers who reported being just satisfied with their purchase. Around a third of respondents said they kept only 44% of the clients from the acquired practice.
One of the most important factors in creating a successful acquisition was finding the right match in terms of geography, product lineup and age. More than half of all successful acquisitions happened between two people who were personal contacts before the deal, which helped improve communication and compatibility, the survey found. Only 10% were brokered by an external consulting firm.
Of course, that does not mean that firms should be keen to sell to the adviser down the street, the survey warned. Many of the most successful acquirers took three years or more to find their partner, so it shouldn't be disconcerting if it takes a while, according to James Poer, president of NFP Advisor Services.
“There's no falling in love with something just because it came to you,” Mr. Poer said. “The trades are all over the place right now and they're often driven by quick movement on both sides and a failure to be thoughtful and intentional about the process.”
Figuring out what to pay for the practice presented another stumbling block, respondents said. The 25% of acquirers who reported being most satisfied with the deal also reported paying more. The average multiple of the alpha acquisition was 1.55 times revenue, compared to 1.36 times revenue for nonalpha acquisitions.
“If you nickel and dime around an acquisition, you go for a second-rate practice, and your experience will be second rate,” said Alois Pirker, a research director at Aite Group.
The most important factors for pricing, in order, were assets under management, client service model, revenue mix, business longevity and cash flow from operations, according to the survey.
More than half the alpha acquisitions (52%) were financed entirely by the acquirer without loans. Advisers who weren't satisfied by their purchase took out personal loans in 73% of the cases. Some of the nonalpha acquisitions also reported difficulty getting that loan, which may mean they were reaching for cheaper practices because of the difficulty in financing, the survey said.
Financing can come from a firm, custodian or small-business lender.
Once a deal was finalized, the study found the majority of advisers in the successful acquisitions had transitioned the business within a year or less, while it had taken three years or more for the less successful acquisitions.
In deals that went smoothly, the adviser had clearly established how the new ownership structure would work and moved swiftly to move clients over. Personal contact with clients was the most effective way to help boost retention, rather than relying on mailings, the survey said. Almost half of the advisers in the top 25% of acquisitions set up one or more meetings with clients to discuss the change.
A total of 36% of the alpha acquisitions reported an increase of more than 10% in revenue for the acquired practice. Only 3% of nonalpha acquisitions reported the same.
The wirehouses are more active so far in making acquisitions than investment advisers. On average, there are 5.9 acquisitions for every 10 advisers at firms such as
Bank of America Merrill Lynch, Morgan Stanley Wealth Management,
Wells Fargo Advisors and
UBS Wealth Management Americas. That compares with around 2.6 acquisitions for 10 advisers in the RIA space.
Wirehouses frequently outpaced other channels because of the structured programs they had in place to help with succession planning and keeping assets at the firm when advisers retired, Aite said.
“I'm not surprised to see wirehouse firms have figured it out,” Mr. Pirker said. “They seem to be doing really well with making sure practices change hands the way they want internally.”
