What's the real story behind RIA mergers? Some are successful, but in general the picture isn't pretty.

That was the takeaway at last week's Financial Services Institute conference in New Orleans, when Fusion Advisor Network's Philip Palaveev moderated a panel with LPL Financial Services managing director Derek Bruton and Triad Advisors senior vice president and chief marketing officer Jeff Rosenthal. All three participants deserve credit for their remarkable candor on a subject that is often swept under the rug. Unfortunately, it's also an area where advisors and their custodians and broker-dealers can experience dramatic financial losses that ultimately damage the service their clients receive.

Palaveev began the session with a few perfunctory jokes about his childhood as a Bulgarian communist and compared an old Belgian
aphorism-that the goal of any transaction should be to buy a Frenchman for what he's worth and sell him for what he thinks he's worth-to the art of M&A. When it comes to deals, he noted that custodians could be very "protective" of their RIA advisor clients and implied B-Ds should follow suit.

Firms that manage more than $500 million typically face better options in succession planning because they have multiple owners and employee advisors and greater overall depth. Since they are not dependent on a single founder, they are in high demand, and can get premium prices because there are multiple buyers.

But Bruton noted that succession planning should entail planning today for retirement in 20 years. That isn't happening. A survey LPL conducted with FP Transitions found that only 4% of advisors in the U.S. have done a valuation and only 10% have a formal succession plan. Scary, especially when one thinks these are the folks giving small business owners around the nation advice on their financial future. Advisors need to start asking themselves tough questions long before they even begin thinking about succession, much less a sale or merger.

Bruton indicated his research showed advisors should "take the best fit, not the best offer." Since most deals are weighted heavily to earn-outs on the back end of transactions, it's important to structure things right. And these B-D execs, who were focusing the session on the RIA side of reps' businesses because that's where the value is, could cite mergers that were win-win situations for everyone involved.

Yet all three panelists could cite numerous horror stories of deals that collapsed for a variety of reasons or ended up with partners suffering from irreconcilable differences.

Among the causes cited for the bad deals:

Past experiences were aligned, but future plans were never laid.

Two firms had similar passive investment philosophies, but the buyer, a male with a mostly male clientele, couldn't communicate with the clients of the seller, a women with a largely female clientele, and they all scattered.

Those advisors who plan to work forever and have no succession plan wind up being desperate sellers. One took three trips to the altar and was jilted every time.

One piece of advice: When advisors get close to a deal, they should prepare two 90-day plans-one for the pre-merger period and another for the post-merger period.

Closely examine and record retention periods, standards of care, privacy and licensing, Rosenthal advised.

There are very few operational efficiencies, despite what the big consolidators claim, according to Palaveev.

What about unwinding deals via divorce, a phenomenon that is far more prevalent than one might think? "Both sides walk away with financial and emotional scars," said Palaveev, who watched the breakup of a transaction between a father and his son.

Then comes the buyback, which spawns its own set of issues. "We bought you at 2.5 times [revenues] and you want to buy yourself back at 1 times," Palaveev said of the mentality some have going into such a sale. He noted the typical repurchase buyback price was
around 50 cents on the dollar.

Still, it's worth doing because no one wants to have an "unhappy partner walking around the office saying the CEO sucks every day," he said. Lingering embittered management teams can be detrimental to a firm's future.