Hurley: By our count, there are more deals in the market right now than there were in the previous four years combined.
Nesvold: There are. The deals also are getting bigger. But fewer than 50% of the “unbanked” deals will actually get done. Sellers’ expectations can sometimes be unrealistically high, particularly if they are using implied pricing from much bigger deals to value a smaller practice, so pricing and form of currency become stumbling blocks. Others have unreasonable demands about integration and post-closing roles and control.
Hurley: So how do you figure out whom to represent?
Nesvold: After nearly 25 years in the business, I can figure out in about five minutes if the market will have an appetite for a particular firm. Often, it depends on whether a business has invested in quality human capital and infrastructure; if it has been selective on its clients, if it has a good P&L and a great local reputation.
That much said, part of our job is to prep the client and put the right buyers in front of them, but invariably they have to sell the vision. And if the client can’t stand up to the level of scrutiny that I know someone like [Fiduciary Network] is going to bring to the table, that’s probably not a good client.
Hurley: What about client psychology?
Nesvold: We do a lot of work up front and have developed an online tool that gets to client psychology early in the process. It really helps clients think about the elements of a deal, the partnership and the post-closing environment that will be most comfortable, while enabling us to understand their motivations.
Hurley: You also published a paper looking at banks buying wealth managers.
Nesvold: We did. In the early part of my career, banks were the most acquisitive buyers; today, we are seeing a lot more advisor-to-advisor transactions and a host of others who have bellied up to the bar.
There seems to be a shared fantasy among wealth management firm owners that right before they want to step down some big unsophisticated bank will show up and offer to write them a giant check, with few strings attached. I would disabuse anyone of that notion.
Hurley: Will bank acquirers lean more towards teams coming out of wirehouses then acquiring traditional independent wealth managers?
Nesvold: Some will, because [the people] have to be comfortable in a bigger environment. In other instances, a bank would prefer to own something that is independent of the trust company or bank charter. Nearly half of the deals that get done today involve a wealth manager as the acquirer; about a third of the transactions involve a bank. Those who find comfort with a bank buyer are often former employees of big companies that went out on their own years prior.
Hurley: What about the roll-ups?
Nesvold: I prefer the term “holding companies.” Their success is often tied to the post-acquisition organic growth [of the firms they acquire.] Their acquisitions are either growing organically or the parent may hit terminal velocity. Growth lowers the effective cost of any individual deal. Without solid organic growth, any promised multiple expansion on [the holding company’s] currency won’t be fully realized.
Hurley: What about cash versus stock deals?
Nesvold: In most cases, cash is king. Otherwise, you are trading an illiquid currency that you control for one that you do not control. If you are taking mostly stock, you had better ensure that the acquirer is growing organically, is profitable and is run by professional management.
Hurley: And you ultimately need liquidity.
Nesvold: You have to have liquidity. If I’m 60, and I have a three- to five-year time horizon, why would I swap out of my own currency to somebody else’s? It doesn’t mean you have to take 100% cash, but there has to be some cash element to the transaction. If I’m 45, and I’m transacting to change the growth trajectory or to take some hats off, that’s a totally different ball game.
Hurley: In terms of wealth managers, it seems that everyone is a buyer.
Nesvold: Every one of my clients is a buyer until they’re not.
Hurley: I talked to a 74-year-old the other day who is a buyer.
Nesvold: Of course he is.
Hurley: What is the profile of those with the greatest likelihood of being successful buyers?
Nesvold: Because there are more buyers than ever, you have to bring some value-add to the seller beyond price. There has to be an alignment of vision, a plan for how you’re going to integrate and evolve the business. The transaction has to be good for both parties and not just the selling owners.
Also, the pricing depends on qualitative and quantitative factors and the allocation of risk. If you can tell me how [a seller] will perform over the next five years, I’ll tell you what price somebody is going to pay for it.
Hurley: What are the other attributes of smart buyers?
Nesvold: They are thoughtful about the changes that they would make and are collaborative about discussing those changes. They think about integration from a “best practices” approach.
Hurley: How important is it to have had prior experience, either successful or unsuccessful, in acquisitions?
Nesvold: Well, you need to have your misses to know what you really want.
Hurley: How many firms today with at least $300 million of assets do you believe will be sold over the next decade?
Nesvold: Probably 300. My guess is half will be sold to other wealth managers.
Hurley: And the successful acquirers are more likely to wind up in the mid-to-large size range?
Nesvold: No question. There are firms that can get to $5 billion organically, but it’s hard to continue that trajectory because of the law of large numbers.
But there is a big difference between material deals and a strategy of tuck-ins. It’s so much harder to get a smaller deal done than it is a midsize deal. Every nickel, every line item in the definitive agreement means more. It comes back to the psychology, too. Every change, every discussion, is amplified.
Hurley: If you owned a wealth management firm, what would be keeping you up at night?
Nesvold: How do we keep up the pace of organic growth, and how do we attract good talent? The talent necessary to source and cater to high-net-worth individuals requires people who have certain genes.
Hurley: What thing has most surprised you in the industry over the last 10 years?
Nesvold: The shift to ETF solutions for clients. I don’t think I envisioned that so much of the money management skill sets would be commoditized.
Hurley: What do you hope is the most pleasant surprise you’ll see over the next 10 years?
Nesvold: That people have been more thoughtful about their business models. Too little time is spent on thinking about what [firms] want to be. As Wayne Gretzky’s father said, you need to skate to where the puck is headed. It would be wonderful if firms started to practice what they preach and do their own planning well in advance of any event that may occur.
Hurley: Thank you very much.
Nesvold: Thank you.
Effie Guo contributed to this article.