Preparing for Merger

As regulatory requirements are accelerating and success of organic growth stalling, more advisory practices are contemplating a merger to facilitate their initiatives. Advisors considering a merger, should consider several important factors surrounding clients, and their respective advisory practices.

Client Considerations

Transition Process

Advisors should begin preparing clients for a merger as soon as possible. Mergers typically entail principals from both organizations to remain with the new entity. Thus, mergers experience lower attrition rates than other financial advisory M&A transactions. However, some key considerations for a successful merger include:

  • How will the merger be communicated to clients from both practices?
  • Are specific employees assigned transition responsibilities?

Service Model

Different practices have numerous approaches to how they service their client base. Some advisors have a documented service model, segmented by client AUM and/or revenue. Other advisors custom tailor services for each household. There are merits and disadvantages of both. Regardless of service structure, key questions emerge:

  • What service model have clients become accustomed to in the past, and what service model will they receive going forward?
  • Which personnel have been client facing in the past?
  • Will client facing personnel be retained by the new aggregate firm?

Investment Philosophy

As with other client practice areas, advisors’ approaches to their client’s investments vary greatly. Some advisors have a clearly defined investment process, that is uniformly applied to all clients via model portfolios. A segment of investment advisors custom tailor the investment portfolio for each client. Important considerations need to be addressed when merging advisory practices:

  • What investments are currently held in clients’ portfolios?
  • Will there be a significant change to clients’ portfolios due the merger?
  • Are there any potential tax consequences as a result of portfolio alterations?
  • If changes are implemented, who will communicate the changes?

Fee Structure

The decision to utilize commission based shares, annuities, life insurance and/or advisory fees varies greatly amongst advisors. When advisory fees are utilized, the percentage charged by different IBDs and RIAs varies as well. Client considerations around fees are crucial to a successful transition, including:

  • Will there be a shift from one type of fee structure - commissionable versus advisory?
  • Will there be a shift in transparency of fees?
  • If fees are altered, who will communicate fee changes to clients?

Geographic Footprint

Practices differ in their geographic diversification. Geographic considerations may include:

  • How will remote clients be serviced?
  • Are satellite offices required?
  • What costs will be incurred from remote clients?

Firm Considerations

Technology

Advisors integration of evolving technology can be driven by their respective IBDs. Key considerations for technology consolidation include:

  • Are the buyer and seller at different IBDs?
  • If so, what technology platforms are utilized at each?
  • If differences in technology exist, which programs will be utilized in the consolidated firm?
  • Should the consolidated entity consider other/new technology?

Personnel Integration

Oftentimes, a client's decision to stay or leave the new consolidated practice hinges on the retention of client facing personnel. Daily communication is commonly assigned to select staff members who have more frequent contact with clients than the selling advisor or his/her chief investment officer/analyst. Personnel decisions are crucial to transition success, such as:

  • Is there overlap in personnel?
  • If so, will responsibilities be reassigned?
  • Will personnel be terminated?
  • If so, who will communicate the terminations to departing personnel?
  • What impact could personnel termination have on client conversion?

Culture

Advisory practice cultures vary greatly from practice to practice. Both seller and buyer need to recognize cultural differences and address key considerations:

  • Is there a clearly defined org chart at the new combined firm?
  • What is the expectations for work ethic at both firms?
  • For example, are “summer hours” employed at one of the firms?
  • What was the PTO allowances for both firms in the past?
  • What benefits package will be offered by the new practice?

Commonly, the principal advisors remain at the new merged entity; as a result, merger transactions require more preparation, standardization, and documentation around firm practices than other M&A transactions. In the event of disagreement in the future, agreed upon practices and principles will smooth transitory hurdles.

Succession Lending recognizes the opportunity for growth that mergers provide. Our Loan Directors enable you secure capital for your new entity.

Interested in financing your merger?