The role of financial advisor might be the closest you can get to owning your own business with the headaches that come from running a firm. You head into work, ride the elevator to your office, sit down at your desk, turn on your computer and learn…your firm, or the parent company of your firm is getting acquired by another firm. What does this mean for you and your practice?
Mergers and acquisitions are similar, yet different. A merger implies a joining of equals. An acquisition means a larger firm buys a smaller one. The larger firm might not even be directly in the same business. A bank might buy a brokerage firm with a branch network. A financial services firm with a branch network might buy a similar, smaller firm to expand its market share and move up the tables in terms of size.
In the advisory world where consolidation has been rampant, one larger, acquisitive RIA might buy a smaller one. Or two firms of similar sizes in adjacent markets might merge in an effort to establish the new entity as a regional powerhouse. These are only a few of all the possible scenarios.
This can be a very scary moment. It shouldn’t be. As a financial advisor, you are on the revenue side of the equation. You are part of the reason another firm thought it would be a good idea to buy the entire operation. You and your fellow advisors have a loyal following of clients who produce steady, reliable income. The firm doing the acquiring needs to keep you as happy as possible, so you stay in your seat.
Who should be worried? If you are on the revenue side of the equation, the other part is the expense side. This is the overhead, the part that costs the firm money. When two companies become one, they realize they do not need two service departments, two IT departments, marketing departments, two training departments and two research departments. They are going to be seeking the cost saving from bringing two sales forces together under one management structure. As a financial advisor, you bring in revenue.
This can be a moment when you might think of joining a competitor or setting up your own practice as an RIA. Perhaps recruiters call with the same suggestion. Traditionally, firms grow by hiring advisors from the competition with the expectation their loyal client base will follow them.
As a financial advisor you can envision your new parent company making some changes to how things are done, so why not take your practice across the street and join another firm? The acquiring firm knows this and needs to consider retention packages. If there is a financial incentive offered by a competitor for you to switch firms, logically they should offer an incentive for you to stay. This would probably be money you don’t get immediately but is promised down the road after time passes or you hit certain thresholds.
Still, you might be concerned about change. Will there be changes in the management team? Will they change the compensation plan? Will they close or consolidate offices? This will probably happen as cost savings related to consolidation are realized, but not immediately.
There’s a concept called the Boiling Frog Syndrome. There is an analogy here. If a frog were dropped into boiling water, it would attempt to jump out! That makes sense! If your new parent company changed everything around at once, plenty of advisors would leave to join the competition. Loyal clients would follow. The assets the firm thought they were buying would disappear. Back to the Boiling Frog Syndrome: If the water is cool and gradually raised a degree at a time, the change is not as noticeable to the frog. Eventually the water boils. In the business analogy, changes are brought in slowly, over time. Management changes often take place at the top and gradually work their way down through the organization.
Will the firm close your office? Now they have two offices downtown. They might be a block apart. The answer is yes, they might, but from the advisor’s point of view, it should not matter. The parent company will consider the leases and floor space at each location. It might make sense to keep both offices open until the earlier lease expires. Will they have sufficient space to accommodate all the advisors together in one location? Will the accommodation be appropriate? As an advisor, your commute is unlikely to change because both offices are nearby. You probably divide your working time between your office and your home. You spend a lot of time out of the office meeting with clients at their place. From your client’s point of view, it is the same firm. They have the same advisor. Only the office address has changed.
What does the new firm bring to the table? Their research department might be better than yours. They might have better technology. Focus first on how the situation might be an improvement and the benefits it brings for your clients.
There will be issues that are not immediately apparent. The new firm might operate two firms in parallel for a while, but eventually account numbers are going to change. This will be a big deal for your clients. The compensation plan might change. Not all managers will make the transition, especially if offices are consolidated. It is important to not forget you and your client base are the assets driving the acquisition.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor is available on Amazon.