Sellers Beware

By Bob Veres

If you read the trade press, you might have noticed that the profession has entered an M&A frenzy—to the extent that we now routinely talk about organic and inorganic growth as if the two are remotely comparable.

Organic growth, to my mind, is attracting clients in the marketplace through superior service and spreading the word about the benefits of Fee-Only (professional) financial planning in your community. There are some very large firms that have mostly grown this way, and I rate them as solid citizens of the advisor ecosystem.

Inorganic growth is buying business in the marketplace—and these days paying a hefty price for it.

Buying Benefits and (Many More) Downsides

The buying frenzy has brought a few benefits to the profession. It allows advisors who never quite got around to creating a viable succession plan to monetize their business. Some might say that the PE firms behind many of the acquisitions introduced new standards of professional management on large (and growing) segments of the advisor population. And …

Well, if you can think of any other benefits, please let me know.

The downside to the buying frenzy makes a longer list. To begin, and I don’t think it’s trivial, these serial acquirer firms are spreading a new pervasive idea that advisory firms have to acquire “scale” to become viable. Somehow scale became synonymous with efficiency and (more vaguely) viability in an increasingly competitive marketplace. 

You can trace the message that smaller firms absolutely must acquire scale to the spokespeople at the larger firms that want to acquire them. It’s a naked scare tactic, and I’m appalled at how well it’s working for many advisors who look at these large and growing behemoth firms as if they’re impossible to compete against and the future of the profession.

Going down the list, I’ve talked with the traditional lenders, who tell me that they can no longer lend enough to the successors of advisory firms to match the offers being made by the serial acquirers. This presents the founder with a dilemma: Do I keep the firm private, sell incrementally to the successors, and leave $5 million or $10 million on the table? If I did, how would I explain that to my family?

These decisions typically balance three concerns at once: preserving a high level of client service, taking care of existing staff, and monetizing the business for the founder. Millions of additional dollars can have the effect of tipping this equation away from clients and staff. Anecdotal evidence tells me that the serial acquirers are busting up perfectly good succession plans and thwarting the ambitions of a lot of would-be successors.

Additionally, this list should include the experience of the founders themselves after they sell. For a rather long article in my newsletter, I interviewed dozens of advisors who had sold to a serial acquirer, and simply asked them about their experience. Off the record, all of them, every one, reported that the experience had been worse—and most often MUCH worse—than what they had expected. 

The dissatisfaction wasn’t about the money, although some of the earnout arrangements and payments in company stock have the potential to create a few unpleasant surprises down the road. The complaint I heard most often had to do with the before and after of client service. As soon as the acquisition was completed, the PE firm behind the transaction began looking for areas where the acquired firm had been (I heard this term frequently) “overservicing” clients. The acquired firm needed to become more “efficient.” It needed to contribute higher levels of profitability per client.

To top it off, every advisor I talked with lamented the lack of control and expressed some frustration with the limitations on their new role with the firm. Their marketing activities were no longer allowed under the stricter compliance regimen. They were asked to do menial chores, like checking all the customer record fields that had to be migrated over to the acquiring firm’s CRM system. They envisioned a new role of mentoring younger advisors but the firm would point out that it never actually promised that.

And finally, the acquiring firm would be impatient that the selling advisors weren’t able to transfer the loyalty of clients they had worked with for decades to the new firm (and the new firm’s staff advisors) in a month or two. In some cases, the fine print of the sales agreement mandated that this happen or else there would be adjustments to the purchase price.

I recently wrote an article which quoted (anonymously) a founder of a small firm who was now in a management position at a much, much larger one—after, of course, an acquisition. She complained that her new firm was inflexible and unable to make changes. Switching to a better tech solution meant getting buy-in from committees, and then retraining 300 staff people—an undertaking not to be made lightly. 

The structure of these larger amalgamations tends to resemble the wirehouse model: staff advisors provide service that is highly structured and controlled, and they always recommend the in-house portfolio models.

A report by Herbers & Company found that the firms pursuing inorganic growth had virtually halted efforts to attract new clients organically.

All of the selling advisors I talked with said that their clients have noticed the reduced service they’re now receiving, and that departures are exceeding the spreadsheet projections on which the purchase prices were based.

Does any of this sound like the future to you? Do these sound like firms that a smaller, more nimble advisory firm with real organic growth can’t hope to compete with?

What the Future Might Look Like

I’m going to venture a few observations about how the current buying frenzy is going to play out. First, the acquisition dynamics sound a lot like the way brokerage firms pay large upfront acquisition bonuses to teams at other brokerages to land their “production”—which has to pay for that bonus (plus a profit) over the next five years. You and I know that money will come directly out of the pockets of the team’s current and future customers.

Similarly, the PE firm expects to make a quick, significant profit on its investment in the firms that are acquired. You and I know who will pay those profits, ultimately.

Second, I’m looking at the staff advisors at the acquired firms, some of whom expected to become owners and decision-makers before their firms were gobbled up. Some will happily settle in, collect a salary, and do whatever they’re told about not overservicing clients. But a significant minority will be unhappy providing lower levels of service, and will still dream of building a firm their way.

That second group of advisors might be inclined to leave and start their own firms. They might find a way to let the clients they had been working with—who are now being underserviced—know that they’re creating a new firm whose goal is to restore their former service levels.

I anticipate that there will be a lot of these smaller firms incubated in the marketplace once the noncompetes run out. They will be nimble, creative, and very nearly impossible for the large, inflexible, ever-growing, wirehouse-resembling giants to compete against.

And THEY will define the future of the profession.

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Bob Veres is the publisher of Inside Information and one of the strongest advocates of Fee-Only planning in today’s profession. If you think his columns are full of the stuff that hits the fan, tell him so directly at bob@bobveres.com.

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