TRANSITION TALK

We write a fair number of white papers every year. As thought leaders, it is part of our job to share our thinking with independent financial professionals in order to advance the profession. In our consulting work, our clients often challenge us with thought provoking questions which open us to new ideas, help us to improve, and occasionally challenge basic assumptions behind the work that we perform. Sometimes questions are really out of left field and our curiosity leads us to an answer worth sharing.

Over the last ten years, increasing numbers of advisors have begun the process of creating sustainable businesses. Many advisors started out as a book or a practice—one-generational models. They took steps to create much more valuable, multi-generational businesses by focusing on enterprise strength and setting up or restructuring essential business structures.

The M&A marketplace is becoming increasingly competitive. Businesses need a strong value proposition to step away from the crowd. Owners who have taken steps to work on building their enterprises are in the best position to leverage their unique business aspects to access more growth opportunities and become successful acquirers or merger partners. 

Advisors constantly seek an answer to the questions “How can I grow faster?” and “How can I increase the value of my practice?” Generally, their focus is on acquisition. However, growth and value are not singular concepts. In other words, achieving a rapid pace of growth needs to be tackled through multiple facets, and ultimately, growth will be a driver of value. However, many practices are not adequately equipped to grow at the rates they are striving for. Technology provides many of these opportunities. Investing in technology has a demonstrated relationship to higher growth, more affluent clients, increased profits, and increased value. 

The rapid pace of technological advancement has provided financial advisors more opportunities to reach a broader client base and manage client relationships more effectively and efficiently. By implementing and effectively utilizing web-based advertising, digital conference rooms, client relationship management (CRM) systems, and billing and portfolio management software, advisory practices of all sizes are able to more closely track their performance and focus their efforts on the market segments they wish to target.

There has been a fair amount of talk over the past decades about consolidation in the financial services industry. Most of the white papers and articles addressing this concept have presented it in a negative light as though it signals the end of the lifestyle practices that dot the landscape in this profession. Industry regulation, growth, technology, fee compression, competition, and aging advisors forced smaller practices to consolidate just to survive. At least that was the working theory.

As the original organizers of the open marketplace for independent advisors seeking to sell or to acquire, we have a slightly different perspective on consolidation; we view it in a very positive light. Consolidation looks very different than what the prognosticators laid out decades ago. From our vantage point of working with businesses below $2 billion in AUM, we’ve observed the industry is indeed experiencing some consolidation, but not only due to acquisitions or roll-ups by companies like Focus Financial, United Capital, or Dynasty. The consolidation that we see every day is owners of stronger, sustainable enterprises acquiring smaller, one-generational books and practices.

Viewed in this light, how better to look after 250 clients or households when a single-owner advisory practice nears retirement than to find a very similarly structured business that can step in, take over, and provide for the staff members as well? This process works for the buyers, the sellers, and, most importantly, the clients.

Our new Trends in Transactions and Valuation Study includes expert insight, commentary, and predictions for the state of the financial services industry. The study dives into last year’s M&A numbers and examines how industry businesses and their values have evolved over the last five years.

This comprehensive, 50-page study features:

As more wealth management businesses look to internal succession, more new owners are being created. As a next generation advisor, you should consider whether ownership is the right path for you, and it is important to understand what ownership entails. Owners of a privately-held business, even with a minority position, enjoy several rights and privileges in exchange for their investment in the company, but they are also responsible for meeting certain obligations.

The following rights and responsibilities apply to all owners whether the business is a corporation governed by bylaws or a limited liability company with an operating agreement.*

Take a look around your hometown. Your favorite places: the coffee shop, bookstore, brewery, dry cleaner, and salon that you frequent on a pretty regular basis are all small business–or at least started that way. Just like you. These founders had a dream and a desire to be their own bosses and make their work something they enjoy doing. Many started in small spaces, just enough room to get the business of the ground. They relied on grit, resourcefulness, and thrift to further their businesses through the first stages. Now, the most successful independent operations are evolving and growing their teams, but many struggle to maintain their position amidst stronger competition, an uncertain economy, and consolidation trends.

Does this sound familiar? The issues of scale, expense management, and growth planning are not unique to financial services. Other professionals begin their businesses with similar limitations, which they must address and overcome in order to reach a baseline of success. Passion and perseverance are powerful fuel, but the challenge comes in creating a business that can support sustainable growth. 

Mergers are transactions that can take on many shapes, apply to almost any size advisory enterprise, and are infinitely customizable depending on the unique details and situations of the participating advisors.  

Advisors commonly think of a merger as the statutory combination of two practices into one in a tax efficient manner, but it’s better to think of the merger process as the combination of two or more advisors’ strengths, client bases, and cash flow streams, while reducing or eliminating weaknesses and inefficiencies – lofty goals to be sure, but readily achievable.

The reality is that mergers can be used to address a much wider set of challenges and opportunities including:

1. Growth through acquisition (i.e., by merging a small practice into a larger practice, and then setting up an internal succession/continuity plan);
2. Finding a successor, or becoming a successor (by first creating an internal, minority equity partner who later completes the buy-out of the founder’s S-corporation or LLC);
3. Establishing a practical and reliable Continuity Plan and protecting the value of your practice against your sudden death, disability or retirement is best accomplished by having an equity partner such as may be created through a merger;
4. Improving Enterprise or Revenue Strength through increased efficiencies and the added strengths of other advisory owners;
5. Expanding market territory, expertise, and services;
6. Building a strong, enduring business by combining the diverse strengths of multiple contributors.

To help illustrate these benefits, consider the following three examples as discussed in our recent Roundtable Talk, “Every Merger Is Unique,” below, each representing an actual merger between independent advisors that we helped orchestrate in 2018: 

You’ve built a business providing financial insight to a growing community of clients. You’ve fostered this relationship over the years and established a trusted role in their lives. As your clients have moved along their journey as professionals, entrepreneurs, investors, or heirs, they’ve turned to you for advice at each step; and now they are counting on your business to be there and to see the process through to the end. This means that as your clients transition into their own retirement, they will depend on your services more, not less. Regardless of the plan you choose, it is your duty as an independent financial professional to have a plan for client service and support that extends beyond your own career.

One way or another, your path as a financial planner will come to an end. The question is whether or not you’re going to exit on your own terms and in your own way. Are you going to create a plan for your exit that preserves the value and growth of the business you’ve spent your career building? Are you going to make sure your clients’ assets are in good hands for the length of their lifetimes, not just for the length of your career?

The average advisor faces a difficult and increasingly competitive industry. With industry consolidation, technological advances, increased competition, more regulatory oversight, and the need to recruit and retain talent, it has never been more critical that financial advisors use benchmarking as part of their ongoing strategic planning process. With benchmarking, a business owner can improve their relative revenue and expense performance, organizational structure, and marketing results to support growth and achieve short-term and long-term goals. Used in conjunction with your business planning process, benchmarking is a powerful tool to track and build additional enterprise value.

What is Benchmarking and Why it is Critical?

Benchmarking is defined as a measurement of the quality of an organization's policies, products, programs, and strategies as compared against standard measurements of their peers and “best-in-class” providers. An effective benchmarking program provides insight into the connection between your business decisions and the resulting outcomes.

Benchmarking improves performance by identifying and applying demonstrated best practices to sales, operations, and procedures. Comparing the relative performance of their products, services, and sales both externally (against competitors) and internally (with ongoing operations and business decisions) ensures that performance meets or exceeds the competition. The objective of benchmarking is to find examples of superior performance and understand the business practices driving it. Effective business owners utilize benchmarking insights to improve their own performance by incorporating these best practices, not through imitation, but through innovation.

The Four “M's” for Incorporating Benchmarking into Business Planning

Every firm has unique needs for benchmarking. For example, the goals of a mature firm versus that of a start-up practice may differ greatly. More established business and solo advisors might be more likely to utilize benchmarks to implement changes that result in increased efficiency and profitability. By contrast, a young developing practice may be more focused on driving and managing growth in clients and revenue.