For much of the 1990s, Armond Dinverno and Mark Balasa would breakfast together three or four times a year. The two Chicagoland financial advisors would discuss the problems in their practices, sort through everything from personnel issues to client expectations to changing retirement-distribution regulations to investment strategies. After several years, the collegial relationship turned into a friendship.

Then, in early 1999 at a J.P. Morgan wealth-management symposium, they broached the idea of expanding their relationship into more than an idea-sharing friendship and possibly merging. It wasn't until one year later at the turn of the millennium when serious discussions began about merging their practices. Eighteen months later, in June 2001, the firm of Balasa & Hoffman merged with Dinverno & Foltz to form Balasa Dinverno Foltz & Hoffman. In comparison, the blockbuster mergers of Citicorp and Travelers Group, as well as America Online and TimeWarner, took no more than a month to negotiate, though regulatory approval was another story.

The fact that it took far longer to negotiate a merger of two advisory firms with combined revenues of $3 million than most Wall Street megadeals speaks volumes about the problems of consolidating financial planning firms. "People in the advisory business are very entrepreneurial, and they guard their lifestyles," Dan Hoffman says. "Many are refugees of large organizations. A lot of attention has been paid to roll-ups in the RIA business, and few have been successful. That's because advisors are individualists and want to control their own destiny."

The Chicagoland firms had a great deal in common. Dinverno and his partner, Mike Foltz, were both certified public accountants and attorneys who came out of what was then PriceWaterhouse in 1984 to start a small law firm in Oak Brook, Ill. At that time, clients were bombarding them with questions about real estate and oil and gas tax shelters, prompting the pair to launch their own commission-based financial planning firm in 1986.

Operating parallel to the Dinverno & Foltz law firm, the advisory shop soon moved into comprehensive financial planning and grew disenchanted with the commission model. In 1991, the advisory firm converted to fee-only, and Dinverno stopped working at the law firm and began devoting himself full-time to financial planning and asset management. "I had about 50 clients," he recalls. "But our law firm had been in existence for seven years, and so we were profitable. We felt a financial planning firm was a better vehicle to address clients' needs. Both firms were built to be independently strong and viable on their own."

Like Dinverno and Foltz, Balasa also came out of the accounting profession. In the early 1990s, he had been tapped to start an advisory division at a regional accounting firm, Burton Associates. The unit, Burton Investment Management, initially was established simply to work with the accounting firm's clients, and it took off in the 1990s. In 1998, Balasa and his partner, Dan Hoffman, bought out the accounting firm's partners and became an independent entity.

By the time they began talking about a merger, Balasa and Dinverno were well-aware that their two firms enjoyed enormous similarities. Both believed in a core portfolio of passive funds, both used individual bonds in many cases, and both used actively managed funds in specific areas like small-cap equities. They also shared similar values about the importance of family life. Assets under management were virtually identical, as Balasa & Hoffman managed $220 million, while Dinverno & Foltz had $230 million.

But it wasn't all sunshine and roses. For starters, Balasa & Hoffman was headquartered in the suburb of Schaumburg, and Dinverno & Foltz was located in Oak Brook. The trip between offices could take anywhere from 30 to 90 minutes, depending on traffic, which can be grueling during rush hour. Partners and employees' homes were scattered all over the Chicago suburbs.

Beyond the logistics, a problem that was solved by keeping offices in both locations, there also were serious cultural and philosophical issues. "They had a set of far more regimented internal processes and procedures than we did," Balasa says. "Our technology was ahead of theirs."

It was clear from the start that if the merger was going to work, Dinverno's more regimented management style would prevail over the loose, informal atmosphere at Balasa & Hoffman. "Armond has very strong management skills," says Mark Tibergien, head of the financial services consulting practice at Moss Adams in Seattle, who was retained to advise the two firms.

Any merger was going to mean big changes. "When you have a partnership of two guys, you can get away with a lot of things you can't with 20 people in the office," Hoffman says.

It was also obvious to both Balasa and Hoffman that while their firm might be a nice place to work, the informality and small size was imposing capacity constraints, limiting its ability to grow. Many successful advisory shops find themselves in a similar position today. "Tibergien told us we were a nine out of 10 as far as matches go, and it was still hard to do," Hoffman says.

Tibergien also told the partners that liking each other and being compatible doesn't mean they can work together in a complementary fashion.. Getting the rest of the employees to buy into the merger was critical. Tibergien began to put all 20 individuals at the two firms through a process he uses called Practice Navigator, which is designed to expose potential deal killers and lets participants pretend for a day that a merger already has occurred. "It's not completely a chemistry experiment," he says. "Once you see the pantyhose hanging over the tub, perceptions start to change."

So everyone at the two firms spent several days in 2000 and early 2001 contemplating the implications of a merger. The goal was not simply to test whether it would a good cultural and strategic fit. Tibergien had them pretend they were already in business together and attempt to look at both the upside and downside. Partners and associates tried to determine what would differentiate a merged firm and how they would be stronger while examining the obstacles to a successful merger. "The hurdles weren't philosophical; they were logistical and cultural," Tibergien recalls.

Strong-willed entrepreneurs who built their businesses against great odds and giant competitors have legitimate reasons to ask why they should change. Partners at both firms were strongly influenced by a white paper published in October 1999 by Mark Hurley of Undiscovered Managers predicting widespread consolidation in the RIA business. They saw advantages to scaling their business, not just in terms of freeing up their time, but also in winning and retaining large clients.

Located across the street from Motorola headquarters, Balasa & Hoffman had found competing for business with senior executives to be increasingly challenging. "One high-ranking Motorola executive looked at both us and Northern Trust and went with us, despite his doubts," Hoffman recalls. "He told us he didn't know if we had staying power. The evolution to a larger firm inspires confidence."

When the merger was completed 11 months ago, Balasa and Dinverno took co-president titles but assumed very different responsibilities, with the exception of sales and marketing, which they share (the firm is considering hiring a full-time marketer). Balasa is responsible tor the firm's strategic direction, investment ideas, technology and clients, while Dinverno is in charge of operations, policy processes and execution of work flow. Foltz runs the law firm and serves as a nonoperating partner at the advisory firm, where he often sits in on estate-planning meetings. Hoffman handles numerous client relationships and sits on the investment committee, while Heather Locus is in charge of taxes and coordinates all financial planning activities.

When one examines the designations and degrees at the firm, its multi-disciplinary reach becomes evident. The 20-person firm has one JD, six CPAs, five CFPs and three MBAs among its 10 practitioners.

According to Balasa, the post-merger period has been characterized largely by successes, along with a few bruises. "We've tried to take the best practices of both firms and go to a new place," he explains. "People have had changes in who they work with, how their work comes to them, and those were big changes."

Unlike the megamergers that dominate the headlines, this merger was not about cost savings, Dinverno says. No jobs were eliminated, and there have been no defections. "Since the merger, you have more people performing more different functions," he says. "This is about spreading our resources."

Consultants like Tibergien believe that the type of consolidation exemplified by these two firms joining forces makes a lot more sense than some of the grandiose visions of building a national firm that were bruited about several years ago. "Consolidation in a local or regional matter makes a lot more sense than spreading yourself too thin by trying to do it on a national level," he says. "This is what happened to law firms and accounting firms. In the case of these two planning firms, the business model made so much sense that they were motivated to equalize things on ownership issues, value and compensation."

To ensure a smooth transition, longtime clients are still dealing with the same professionals they used before the merger. Dinverno says they are being told the new firm's expanded roster of experts is sharing ideas behind the scenes.

It's a different story for new clients, however. The vast majority of them are shared across the firm. "Working in a team environment makes us much stronger," Dinverno argues.

In some ways, the biggest change was cultural. "We had to give up the more informal atmosphere," Hoffman says. "They, in turn, have learned to relax a little."

Since completing the merger, many of the most important aspects of the firm's work have been overhauled. Financial plans and investment policy statements have been standardized. Balasa & Hoffman had a slightly more sophisticated approach to investments, while Dinverno & Foltz had a more comprehensive wealth-management and estate-planning offering. Now, everything from assumptions about inflation rates and investment projections to presentation graphics are the same in the merged firm.

The transition to a more professional environment also has paid dividends. "It's motivated everybody to step up a notch, examine how they do things and find new ways to do things on a best-practices basis," Hoffman says. "People are more focused on the firm as a business entity. It's more than just a practice."

Leveraging the relationship with the Dinverno & Foltz law firm, which specializes in estate planning, tax work and buy-sell agreements for small-business owners and physicians, is another component of the firm's growth strategy. At the time of the merger, about one of Dinverno & Foltz financial planning clients were clients of the law firm, while 20% of the law firm's clients also used the planning firm. Both percentages are expected to rise. "We want to give clients independence and choice," Dinverno says. "We think it makes sense to use both in terms of coordination but we let clients choose."

Over the years, Foltz has found many advisors don't communicate effectively with clients about estate planning, partly because the client relies on others to perform that function. "It gives clients a great deal of comfort to know that their wealth-management needs are being examined on a coordinated basis."

For Locus, who became a partner at the time of the merger, the new firm's access to quick legal advice was extremely compelling. "When a downsized client is negotiating severance, we could get his employment contract reviewed in less than a day," she says.

Balasa notes that service providers like Schwab are starting to segment their offerings by firm size, devoting the most resources to larger firms with $500 million or more in assets under management. With $470 million in assets, their merged entity is going to wind up in that ballpark.

Recent moves by Schwab, the firm's custodian, raised some eyebrows among the partners, but their reaction was somewhat different from most firms. "Schwab's moves cause us to think of how we are positioned in the marketplace, and we've upgraded our services," says Dinverno, who sits

on Schwab's advisory council. "Competition is a good thing in that sense. It challenges us to be better and, as a large organization, we can do that faster."

Balasa acknowledges that he spends a lot less time putting out fires than he used to do. These days, he's focusing on tasks like marketing and looking beyond day-to-day problems to try to anticipate future challenges. "It's easy to get stuck on little territorial issues, and it can be tough if people don't realize this," he says.

The new firm now has built-in excess capacity for growth. The ability of partners and employees to focus on long-term issues beyond simply struggling to keep their heads above water is also a positive development, as is the fact that no one feels quite as indispensable as they did two years ago.

"A business must think, react and survive independently from the owner," Dinverno says. "The business and the owner think they are one. They are not. And you need to energize people to take ownership. Mark and I get along very well, but you have to put the combined success of the firm ahead of everyone else."

The pain has been worth the gain-even if your name moved from second in the firm's list of partners to fourth. "As a principal, I feel more comfortable in our ability to compete in the Chicagoland sarea," Hoffman says. "We're a more formidable competitor now."

Size And Scale Create Career Paths

Go to any financial planning conference, and one can hear advisors chatting in the halls about how hard it is to find good associates these days. Ask any bright young college graduate who wants to be an independent advisor where the job opportunities are, and he or she will tell you most of the jobs are with big institutions that pay lip-service to financial planning and are anything but independent.

One of the biggest advantages larger advisory firms enjoy is their ability to create career paths to attract and retain high-quality personnel. "A more defined career path attracts better people," says Mark Balasa. The co-president of Balasa Dinverno Fultz & Hoffman helped recruit an MBA from the University of Chicago to his firm this year.

"I can't tell you how often I've heard a firm's owner say, 'I spent so much time developing that ingrate, and then they left,'" notes industry consultant Mark Tibergien. A survey Tibergien conducted for the Financial Planning Association found that more than 80% of advisory firm principals had no plans to offer anyone equity. Amazingly, they wonder why people leave.

"People want the opportunity to be a partner," Tibergien explains. The secret to achieving this objective is to grow the firm to a size where it can add partners without diluting the owners' income.

"We believe working in a team environment makes us much stronger," Co-President Armond Dinverno says. "Creating a career path makes it much easier to attract high-quality people and offer better benefits and better continuing education. For people to get responsibility, you have to give responsibility."

Small practitioners may not want to hear it, but larger, more structured firms often give employees a more clearly delineated set of assignments and expectations about their job performance, he adds.